What is An LLC: Everything You Need to Know
An LLC can get a tax identification number, open a checking account, and do business, all under its own identify.3 min read
What Is an LLC (Limited Liability Company)?
Like a company, a limited liability company (LLC) is a separate and distinct legal entity. An LLC can get a tax identification number, open a checking account, and do business, all under its own identity.
An LLC is the simplest enterprise structure. In contrast to an S corp or C corp, an LLC's structure is versatile. An LLC also offers you the perk of pass-through taxes, limited liability (obviously), and legal protection of your private property. An LLC is a hybrid enterprise group that combines the best of the following:
- Sole proprietorships
Every proprietor (additionally referred to as a member) of an LLC has limited liability as a stockholder of a company. LLCs permit any entity to be owners, including the following:
- Other LLCs
Limited liability companies are not required to submit many of the typical documents that other corporations are asked to, like annual reports, shareholder meeting minutes, and other formalities. Additionally, profits and losses can be divided differently with other entity designations.
In contrast to partnerships, which should distribute earnings relative to ownership percentages, LLC members can distribute earnings through any method they choose without regard for the financial contributions of its stakeholders.
Limited liability companies are legally authorized in every state in the U.S. In fact, single-owner LLCs are also recognized throughout the country. Some states may tax LLCs as if they are a corporation. In the eyes of the IRS, companies that are currently designated as a sole proprietorship may modify its status to an LLC without facing any federal tax penalties.
What Is a Limited Partnership?
A limited partnership has a number of basic partners and a number of restricted partners. In a limited partnership, the involved entities take part in administration and have full legal responsibility for its obligations.
Limited partners are not allowed to take part in the administration of the business, but also don’t carry additional liability beyond their financial contributions. This protects them from private legal responsibility for the partnership's debt and other obligations. Limited partners obtain a share of the earnings for their involvement. Many companies like limited partnerships because they provide limited liability to the investor while providing the company with much needed capital.
Types of LLCs
Different LLC varieties work best for specific business situations. The most typical forms of LLCs are Domestic LLC, International LLC, and Professional LLC.
Domestic Limited Liability Company
If a limited liability company operates in the same state that it was created in, it can be referred to as a domestic LLC. When people say LLC they are very often referencing a domestic limited liability company.
Foreign Limited Liability Company
When a domestic LLC wants to open a new office or change the state within which it operates, it will need to apply to register as a foreign LLC. For instance, if you operate a company in Florida and decide that you’d like to expand into Georgia, you’d need to attain a foreign LLC in Georgia.
Professional Limited Liability Company
Professional service companies like accounting or legal practices will need to be registered as a Professional Limited Liability Company (LLC). State-issued professional licenses may be required for a company to qualify for a professional LLC. The important note on the professional LLC designation is that personal liability is not protected for malpractice claims. Thus, it’s important to seek professional counsel so that your professional LLC is fully aware of its liabilities.
Advantages of an LLC
In an LLC, provided that there is no fraud or prison record, the proprietors are usually not personally liable for the company’s debts or lawsuits. Forming your small business as an LLC brings added credibility. An LLC is acknowledged as a more formal enterprise structure than a sole proprietorship or partnership. With LLC in your small business name, prospects and partners know that you're a serious enterprise. After you have fashioned an LLC, your small business can start constructing a credit score history. It will help your small business secure loans and strengthen its credit score.
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