What Does an LLC Do?: Everything You Need to Know
What does an LLC do? Find out whether forming an LLC would be beneficial for your business.3 min read
What does an LLC do? Find out whether forming an LLC would be beneficial for your business.
What Is an LLC?
An LLC gets its own tax identification number and bank account. It carries out its transactions under its own business name.
Owners of an LLC are not liable for any business debts and liabilities, even in extreme circumstances like bankruptcy. If the business funds and assets are insufficient to repay the company's debts or liabilities, the creditors can't hold the owners personally liable for payment. This is one of the major advantages of forming an LLC.
LLCs Versus Corporations
- A corporation is a more formal structure, which is subject to rigid rules and procedures. An LLC, on the other hand, offers a more flexible and lenient setup.
- An LLC is not taxed as a separate entity; its income or loss goes into the personal tax return of members, unless it chooses to be taxed as a corporation.
- Unlike in the case of a corporation, an LLC does not have a board of directors. The members either manage the LLC themselves or appoint a manager to oversee its operations.
Many small scale businesses in America opt for LLC due to less complexity, government protection, and ease of formation. Just like a corporation, an LLC can also have any number of employees.
Why Form an LLC?
- It's fairly simple and straightforward to form with minimal paperwork. The annual filing fee of around $200 is quite affordable, too.
- The suffix of LLC or limited Liability company changes the perception of the investors, clients, and general public.
- Personal assets like a home, cars, and bank accounts of members remain safe from business liabilities.
- You can have significant savings in taxes since the income or loss from the LLC can be clubbed with your personal income.
- Unlike in the case of corporations, it saves you from double taxation of income.
Things to Consider Before You Set Up an LLC
- While the existence of a corporation is not affected by entry and exit of shareholders, an LLC can be very susceptible to such developments. Even if a single member leaves the LLC, it can terminate its existence.
- Forming an LLC in your home state (where you wish to conduct the business) may cost you less since you'll not have to pay franchise taxes. It will also save you from the burden of filing annual reports in several states.
- Forming a single-member LLC may not be of much benefit unless your business involves a significant amount of risk.
- Protection of personal assets: Unlike in the cases of sole proprietorships and partnership firms, the personal assets of LLC owners are not vulnerable to business debts.
- Flexibility in tax filing: By default, a single-member LLC is taxed like a sole proprietorship business, while a multi-member LLC is taxed like a general partnership. However, an LLC can elect to file its tax returns as a corporation.
- Credibility and perception: Forming an LLC builds your credibility since it shows that the owners are committed to the business.
- Minimal formalities: Legal documentation required in forming an LLC is less than that in the case of a corporation. The organizational structure is simpler since it does not have a board of directors.
- Formation expenses: Formation expenses of LLCs are usually higher than in the case of sole proprietorships and general partnerships.
- Transfer of ownership: Unlike corporations where you can easily transfer your ownership by selling your shares, it's difficult to transfer your ownership in an LLC.
- Less evolved structure: Since an LLC is a relatively new form of business, the laws governing it are not very evolved. This may sometimes lead to confusion in interpretation and application of legal provisions.
- Self-employment taxes: Owners of an LLC are subject to self-employment taxes. Sometimes, the amount of these taxes may be higher than the income tax savings you make.
- Lacks clarity in roles: Without specific roles of members, it often becomes difficult for creditors and investors to know the person authorized to sign a contract or document. However, such confusion can be avoided through an operating agreement.
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