What Does LLC Stand For? Everything You Need To Know
What does LLC stand for? LLC is the abbreviation for Limited Liability Company 1 of 4 structures that businesses can formally organize and register in the US.6 min read
2. Functions of an LLC
3. Misconceptions of LLCs
4. Different Types of LLCs
5. How LLCs Are Taxed
6. Exclusions of LLC
7. Other Information Regarding LLCs
8. Is LLC Right for You?
9. Why Consider Opening an LLC?
What does LLC stand for? LLC is the abbreviation for Limited Liability Company, one of four structures that businesses can formally organize and register as in the United States. LLCs provide important legal protections for individual business owners and partnerships, shielding them from personal liability from debts and, in many instances, court-imposed settlements incurred by the business. If you are forming a business, it is essential to understand the answer to the question, “What does LLC stand for?”
An LLC provides the advantages of a corporation with the functional agility and tax benefits of a partnership. Among LLC signature features:
- LLC owners are referred to as members. There are few restrictions on who, or what can be defined as an LLC member. An unlimited number of individuals, corporations, other LLCs, and foreign entities can all be members of a specific LLC.
- Among the biggest advantages of forming an LLC is implied in its name — limited liability. An LLC's members' personal assets are usually exempt if the business incurs debt or is sued. That “limited” protection from liability does not extend to members if an LLC or its employees engage in illegal activities or is grossly negligent.
- Like a fully vested corporation — abbreviated as Corp. — an LLC can formally elect a president and board of directors and make decisions in board meetings. Or, an LLC can opt not to elect officers but appoint them and not stage meetings. In fact, an LLC could, technically, be an LLC forming an LLC to serve as a subsidiary LLC or one individual could be the sole owner/member or an unlimited number of LLCs.
- LLCs can choose not to directly pay taxes on net profits. Its members pay taxes on income derived from the LLC on their personal tax returns. This is referred to as the LLC's pass-through benefit.
- LLCs can also opt to operate under a corporate structure in which net profits can be taxed separately from members' income. The advantage here is the IRS's corporate tax rates are generally lower than personal income tax rates.
- To avoid double taxation, an LLC can elect to be taxed as a partnership and company profits are passed on to the members and taxed once on their individual tax forms. This is called pass-through taxation.
- LLCs offer the capacity for a small business to evolve into other operational structures should they grow and their expanding needs foster the need for change. Conversely, a fully vested corporation can downsize into an LLC should that operational infrastructure be more suitable for changing circumstances.
Functions of an LLC
Before the mid-1970s, a company was only able to choose between two business structures: corporations or partnerships. Both of these structures had major disadvantages associated with them. When the limited liability company entered the scene, it became extremely popular due to the simplicity of its structure, the low cost of forming one, and the fact that it incorporated many of the benefits of both business structures, while excluding many of their disadvantages.
Misconceptions of LLCs
Although limited liability companies have become extremely popular, as of 2010, the Internal Revenue Service states that they are still not officially recognized by the United States federal government. Rather, LLCs are required to file as one of the following on their tax returns:
- Sole proprietorship
In most cases, if the company doesn't specify their chosen tax structure, they'll automatically be considered as a corporation by the IRS.
Some business types, including insurance companies and banks, are unable to form as an LLC. However, the specific restrictions placed on who can and can't form a limited liability company depends on the laws pertaining to this structure in the specific state the company is registered in.
Different Types of LLCs
The different types of LLCs include:
- Single-Member: Single-member LLC owners can file taxes as a disregarded entity or a corporation. Under a disregarded entity, a separate LLC tax return is not required and its income is reported on members' 1040 and taxed as personal income.
- Partnership Corporation: Multiple-member LLCs can choose to be an incorporated partnership for tax purposes. As with single-member disregarded entities, a partnership is a pass-through, meaning members pay taxes on its profits on their personal returns.
- C Corporation: If an LLC has more than one member, it must file separate federal and state tax returns as a “C Corporation.” In a C Corp., profits remain in the corporation and are taxed at corporate rates.
- S Corporation: In an S Corporation, LLC income is allotted to individual members as pro-rata shares under Schedule K-1 on individual member's Form 1040.
How LLCs Are Taxed
When an LLC chooses to operate as a corporation, the company's profits are considered to be completely separate from the income of the company's members. This means that any profits that are generated are taxed according to the corporate tax rates that have been set forth by the IRS. This is beneficial because corporate tax rates are often lower than individual tax rates. Simply put, that means there's more untaxed money at the company's disposal.
Keep in mind, however, that when a corporation shares its profits with its shareholders, that money is taxed a second time when those shareholders report it as income on their personal tax returns. To avoid this double taxation issue, limited liability companies can choose to be taxed as partnerships. When this happens, the company's profits are passed directly to its members and, as a result, profits are only taxed once when they are reported on each member's personal tax returns. This is commonly referred to as pass-through taxation.
Exclusions of LLC
A limited liability company's members aren't excluded from liability if they are found to have engaged in multiple illegal activities, such as:
- Using the company to commit fraudulent acts
- Personally promising to repay some of the company's debts
- Negligently appointing an employee, supervisor, manager, or another member who subsequently causes damage or harm to a third party
In addition, due to the level of protection LLCs offer to members, some business types, such as banks and insurance companies, are not eligible to form as an LLC.
Other Information Regarding LLCs
In most states, it's possible to quickly and easily convert to the LLC business structure simply by filling out a certificate of conversion. Some states, however, require that existing companies start the registration process from scratch and formally file their articles declaration with the appropriate secretary of state. The company converting to an LLC will also be required to transfer any and all pertinent information related to their business, including things like sales tax permits and identification numbers, to its new legal entity.
A small number of states also require the converting company to publish an article in local newspapers, declaring the end of their partnership and the creation of the new limited liability company. For specific requirements in your area, the best course of action is to contact either a business attorney or go directly to the office of the secretary of state. Never assume you know what needs to be done until you have contacted an industry professional.
Is LLC Right for You?
Before you begin the process of formally incorporating a business, it is important to determine if forming an LLC is the right choice for your business. While you can form an LLC on your own, there are many potential pitfalls that make consulting with attorneys who are specialists in small business law in specific states a cost-effective investment.
Upcounsel.com provides a comprehensive listing of LLC documents and provides a directory of attorneys who are practitioners in distinct fields of business law with advice on such matters as what to do after forming an LLC.
Why Consider Opening an LLC?
The main advantage of operating as a limited liability company is that the LLC's members are provided with a measure of protection against the company's legal and financial obligations. Simply put, this means that members' personally owned property can't be seized in the event that the company faces bankruptcy or is found to be financially liable in a legal action. Another major benefit associated with LLCs is that they are generally less expensive than starting a corporation and offer many of the same benefits.
If you have questions about LLCs, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.