What is a Limited Liability Company: Everything You Need to Know
A Limited Liability Company, also known as LLC, is a basic business structure that can protect its owners from liabilities that come with running a business. 4 min read
What Are Limited Liability Companies (LLCs)?
Understanding what a Limited Liability Company is will help you determine whether it is the right business designation for your company. A Limited Liability Company, also known as LLC, is a basic business structure that can protect its owners from liabilities that come with running a business.
LLCs give owners several benefits like pass-through taxation, protection from legal recourse, and limited liability in the sense that personal property is not tied with business operations. The LLC also makes the business appear more professional, while helping adhere to legal responsibilities of running a business.
The LLC designation allows your business to operate as a separate legal entity, similar to being incorporated, even if it is just being run by an individual. You can operate an LLC under any available name and can even obtain a tax identification number, take out a loan, and open a bank account all under the LLC’s name.
Understanding LLCs Better
A Limited Liability Company or LLC is a hybrid designation that affords its owners the flow-through tax benefits of partnerships or sole proprietorships and the limited liability and personal protection that corporations have. This versatility makes Limited Liability Companies one of the most popular business designation in the U.S.
LLCs are typically easier to organize and form than corporations and offer very similar versatility and protection to its owners. LLCs can also decide how they want to be taxed with the federal government. They can be recognized as a sole proprietorship or a corporation for tax purposes.
One of the difference between an LLC and corporation is the lifespan of the business. If the owner of the LLC dies the business is discontinued, unless a continuation agreement which outlines the interest delegation to succeeding members or owners was completed prior to the death.
While LLCs do afford its owners a great deal of protection, there can be legal recourse if its charged with fraud or other wrongful acts such as refusing to complete and report legal requirements.
Another distinction of the LLC is the tax benefits given to its owners. Similar to a proprietorship and partnership, LLCs get to recognize gains and losses of the company on their personal tax returns. As a young business, this flow-through tax method can help you early on while also eliminating double taxation.
What Are the Advantages of an LLC Designation?
There are many benefits to forming an LLC designation. Below are a few of the most common reasons business owners create a Limited Liability company.
- The tax benefits with LLCs: Owners of LLCs do not need to pay income tax twice and the gains and losses of the LLC can be recognized on the individual tax returns.
- The ownership flexibility of LLCS: LLCs can have owners outside of the U.S. The flexibility for foreign ownership makes LLC a popular designation for international businesses.
- The protection from business risks: LLC owners have protection against business debt and obligations. Whatever debt the company owes is tied only to the company and not the owners. If the LLC ends up filing bankruptcy, the owners are not required to pay the company’s debt with personal money, even if the LLC’s assets are not enough to fulfill all obligations.
- The perception of structure and organization: LLCs gives a business a more formal structure. Customers and partners see LLC as a sign of professionalism and organization.
- The informality of LLCs: Unlike other business designations, LLCs do not need to conduct ownership meetings or maintain business notes.
- The financial versatility: A Limited Liability Company, being its own legal entity, can even build its own credit and has access to business loans. These loans are tied to the LLC and not the owner.
What Are the Types of LLCs?
There are a few different types of LLCs that business owners can file. The first option is a Domestic Limited Liability Company (DLLC) which is the designation given to a business that is operates in the same state where it was formed.
Another option is a Foreign Limited Liability Company (FLLC) which is when a business operates outside of the state that it established the LLC within. FLLCs are quite common because many businesses choose to establish their LLC in a state that has favorable tax breaks and other lax legal requirements.
The final LLC type is known as Professional Limited Liability Company (PLLC) which is given to a LLC that is formed for a specialized service field like legal or medicine. In addition to the PLLC these owners will also need to acquire state or federal licenses for their profession. PLLCs do not protect owners from malpractice suits.
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