What Does LLC Mean: Everything You Need to Know
A typical LLC is one formed by a single person. LLCs are a completely separate legal entity from the owner.4 min read updated on February 01, 2023
What Does LLC Mean?
LLC means “Limited Liability Company.” The term LLC is used to describe the type of business structure in which owners or partners are afforded limited liability for a company’s financial obligations or debts and liabilities.
The LLC designation is a hybrid of other business entities like the corporation and partnership. Owners of a Limited Liability Company receive the same personal protection that corporate owners receive and the tax benefits and flexibility that partnerships and sole proprietorships receive.
The business term “members” is often used to describe owners of an LLC. Some states have restrictions or requirements for LLCs that have single or multiple members. It’s important to research your state’s specific rules and regulations associated with forming and maintaining a good-standing LLC.
The History of LLCs
The Uniform Law Commission (ULC) says that the first state to approve the Limited Liability Company Act was Wyoming in 1977. The ULC approved the Uniform Limited Liability Company Act in 1996 which it recommended be enforced across all U.S. states. This Act has sense been reformed and amended multiple times.
The rules governing LLC vary from one state to the next. Not only are in-state LLC statutes unique, but LLLCs have conditions that allow members to enact LLCs outside of the state where they operate their business. Forming an LLC outside the state you conduct business within is known as a Foreign LLC and has its own specific regulations to create.
Because LLCs are a relatively new business entity, the structure is much more flexible than previous business designations. Members can create LLCs even if they are not living in the U.S. LLCs are free to pick their own tax designation. Additionally, LLC owners are not required to conduct member meetings or record minutes.
LLCs Have Tax Advantages
One of the main reasons LLCs are so popular is their various tax advantages over other business types like corporations, sole proprietorships, and partnerships. One of these advantages is that the IRS lets LLC members pass the gains and losses of the company through to their personal tax return. Being able to trickle profits and deficits onto a personal tax return helps minimize personal tax expenses while also preventing double taxation which happens with corporate taxes.
LLCs are also free to pick their tax designation. The available options for LLC members as it relates to filing taxes are to be taxed like a corporation, a partnership, or a sole proprietor, depending on what option is most favorable for your business.
LLCs Have Flexible Ownership
LLCs have very relaxed ownership rules. Other business entities like corporations have a finite number of owners that are determined by shareholders. LLCs do not have member restrictions.
Furthermore, other entity designations cannot have owners that are outside the U.S. LLCs, on the other hand, can have foreign citizens as owners.
You can also form an LLC with only one member. Owners of Limited Liability Companies can also be other businesses and other LLCs.
LLCs Have Decreased Liability
The term “Limited Liability” speaks for itself, but one of the biggest advantages to creating an LLC is the protection members have. Owners of LLCs aren’t personally liable for any company debt or lability like court judgements.
For example, if your LLC owns a building and one of the tenants of that building files a worker’s comp claim, you as an owner are not liable for any damages or fees, it falls on your LLC. Additionally, if a company goes through bankruptcy, the owners are not responsible for fulfilling any of the debt obligations.
One important note about personal liability and an LLC is that if you personally guarantee a loan, you will be responsible for fulfilling the obligation.
LLCs Have Flexible Management
Unlike corporations which have managers and boards of directors, LLCs operate with each member having management roles in the business. LLCs can have one or multiple managers, it is entirely up to the description of the owner(s). There are even some LLCs that have specific members managing the company and other silent partners sharing in the profits.
What Are the Types of LLCs?
There are a few different types of LLCs that you need to know. The first is known as a Partnership Limited Liability Company which refers to an LLC that is created with more than one person. Partnership LLCs can use the Form 8832 to alter to traditional corporate taxation if the owner wishes.
A typical LLC is one formed by a single person. LLCs are a completely separate legal entity from the owner.
Another type of LLC is known as a Professional Limited Liability Company. The Professional LLC is given to a company that works within a specific service industry such as medical, legal, or accountancy. In addition to acquiring a Professional LLC, these entities will need to receive their own professional licenses and will be responsible for malpractice claims.
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