“What is full form of LLC?” is something that entrepreneurs should know if they are planning to start a limited liability company (LLC) or convert an existing business to an LLC. An LLC is one of the most preferred business structures because it protects its owners from being personally liable for its lawsuits and debts, while enabling them to pay taxes at the individual level. While an LLC has its advantages, it also comes with limitations. You need to have a good understanding of how an LLC works before you elect LLC status.

What Is the Legal Structure of a Business?

Usually, the legal structure of a business is characterized by the number of owners it has, its nature of business, and the ways it manages liability and tax issues. For some businesses, legal structure is indicated in the name with a term or abbreviation such as “Co.,” “Inc.,” or “Ltd.”

What Is an LLC?

An LLC is essentially a hybrid business entity that combines the elements of a corporation and a sole proprietorship or partnership. It is a simple business structure. Unlike a C corporation or S corporation, it has a flexible structure. An LLC's name must contain “LLC,” “Limited Company,” or another variant or abbreviation. It is able to conduct business, obtain a tax identification number, or open a bank account under its own name

In an LLC, the owners are referred to as members. The members are protected from personal liability and pay taxes on the company's income on their individual tax returns. The LLC itself only needs to file an informational tax return. Members have the freedom to share profits as they please. They are regarded as self-employed, so they are subject to self-employment tax.

Pros and Cons of an LLC

Pros

  • Simplicity – An LLC is not required to hold special meetings, keep extensive company records, and comply with many formalities.
  • Tax flexibility – An LLC has a flexible tax structure that allows you to devise a tax plan that suits your needs.
  • Pass-through taxation – Members of an LLC report the profit distributions they receive on their personal tax returns, enabling you to avoid double taxation.
  • Liability protection – An LLC gives you protection against personal liability for its debts and financial obligations.
  • No residency requirement – In an LLC, members are not required to be citizens or permanent residents of the U.S.
  • Increased credibility – If your business is an LLC, it will make a better impression on your partners, suppliers, and prospective lenders.

Cons

  • Limited growth potential – Since an LLC is unable to issue shares, it is not as appealing to investors as a corporation.
  • Self-employment tax – The income of an LLC is subject to self-employment tax.
  • Tax on appreciated assets – Your appreciated assets may be taxable if you elect LLC status for an existing business.
  • Non-perpetual existence – An LLC will be dissolved in the event that a member passes away or declares bankruptcy.
  • Annual reporting requirements – An LLC is required to file with the state annually in order to maintain its LLC status. Depending on the business and franchise tax laws of your state, you may have to pay ongoing fees whether or not your business is profitable. For instance, California imposes an annual franchise fee of $800 and LLC fees on all businesses regardless of whether or not they are active or profitable.

How to Set Up an LLC

  1. Select a legal business name. In some states, you are allowed to reserve your business name with the Secretary of State.
  2. Create and file the Articles of Organization with the Secretary of State.
  3. Choose whether your LLC will be member-managed or manager-managed.
  4. Decide the number of owners your LLC will have.
  5. Apply for licenses, permits, or other certificates that are required in your industry.
  6. Obtain an Employer Identification Number (EIN) by either filing IRS Form SS-4 or applying online at the website of the IRS.
  7. Apply for other identification numbers that are required in your state and locality. Requirements may vary between jurisdictions, but your business will most likely have to pay disability, unemployment, and other payroll taxes. You will have to apply for identification numbers for these accounts.

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