What Does LLC Mean in Business: Everything You Need to Know
The term LLC in business means the owner has limited financial and legal liability for that business entity. 3 min read
What Does LLC Mean in Business?
The term LLC in business means the owner has limited financial and legal liability for that business entity. LLC is an acronym for limited liability company and is a business designation that affords its owners protection from the financial obligations and legal ramifications that come with running a business.
An easy way to think of LLC is like a hybrid form of corporations and sole proprietorships or partnerships. An LLC provides its owners personal protection just like a corporation and it also has incredible tax flexibility that are given to sole proprietors or partnerships. This overlap of functions from other business entities helps LLC owners acquire many of the benefits without the risks.
The Limited Liability Company is one of the most popular businesses in America because it is easy to form and run, it provides flexible management options, owners have limited liability, and the tax benefits are favorable.
How Do LLCs Compare to Corporations?
Limited Liability Companies are similar to S corporations and C corporations because they provide owners the same protection and separation from business liabilities. One of the main differences between corporations and LLCs is the ease to attract investors. Because corporations have limited ownership, they can easily distribute ownerships rights in the form of shares. Limited Liability Companies do not have this same option, which can make acquiring funding as an LLC more difficult.
Benefits to Forming an LLC
There are several reasons to consider forming an LLC instead of other business entities. For one, the LLC designation gives its owners protection that can mitigate personal financial or legal damages that impact the firm. If the company goes bankrupt, the owners are not personally responsible for the debt or liabilities of that company.
Another benefit to forming an LLC is the tax-related advantages. Owners are able to recognize the companies gains and losses on their personal tax returns instead of being taxed at the corporate-level. This pass-through tax method helps business owners avoid hefty taxes because losses can be deducted on personal income and the individual also doesn’t pay double taxes.
Not only can recognize the LLC taxes on your personal return, but you can also pick the tax option that you want your LLC to be represented under. You can decide to tax your LLC like a sole proprietor, a partnership, or a corporation. This tax flexibility lets you customize your LLC taxation to benefit your company the most.
Limited Liability Companies also offer favorable management and ownership options and requirements. Unlike other business entities, LLCs can have owners that are foreign citizens. Limited Liability Companies are also able to have one owner or multiple owners, depending on what its members want. One of the best aspects of LLCs to its managers is the lack of formalities. LLCs do not need to conduct board member meetings and its managers can be active in the day-to-day or silent partners.
Disadvantages to Forming an LLC
Limited Liability Companies are not perfect for every situation. Because LLCs are relatively young, many investors are hesitant to invest in businesses with this designation. Additionally, the lax legal requirements to form an LLC make it easy to form, but hard to conduct strategic agreements with. If you need to strike contracts or partnerships with your LLC, you will likely need to hire an attorney which can create added costs.
Additionally, because an LLC and its members are separate in the eyes of the law, so too must the financials. Even if you’re an independent owner of your LLC, you need to keep your business financials separate from your personal records. This organization of documents and recordkeeping can make LLCs difficult.
Can You Convert a Business to an LLC?
In many states, a business can be easily converted into an LLC by filing a document called a Certificate of Conversion. In the event that you wish to convert to a Limited Liability Company, you will need to transfer all important information from your previous business into your new LLC’s name such as the tax identification number, tax permits, and other business licenses.
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