What Is LLC?: Everything You Need to Know
LLC is a popular business structure because it provides personal liability protection for its owners, while allowing them to pay taxes at the individual level.3 min read
“What is LLC?” is a question that many existing and aspiring entrepreneurs ask when they wish to start a new business or change the legal structure of an existing business. A limited liability company (LLC) is a popular business structure because it provides personal liability protection for its owners, while allowing them to pay taxes at the individual level. The process of forming and maintaining an LLC is relatively easy. However, you need to take into consideration the pros and cons of forming an LLC before you decide to do so.
What Is an LLC?
An LLC is a type of company that has one or more owners, who are also known as members. It is generally managed by its members, but in some cases, its daily operations may be managed by a manager. There are many benefits to forming an LLC, including:
- Protection against personal liability in lawsuits
- Prevention of double taxation
- Less paperwork
- More credibility
An LLC is an ideal business structure for small businesses because it offers the right combination of simplicity and personal asset protection. Unlike a sole proprietorship or a general partnership, it protects your personal assets in the event of a lawsuit. Unlike a corporation, it is relatively easy to establish and maintain, and does not require you to pay taxes twice. In other words, an LLC is a business entity that combines the elements of a sole proprietorship, partnership, and a corporation.
Advantages of an LLC
- Personal liability protection – An LLC's members are not personally liable for its debts or lawsuits, unless there is fraud or criminal behavior.
- Pass-through taxation – The profits of an LLC go straight to its members, who will then report the profit distributions they receive on their personal tax returns. Therefore, the profits are taxed only once. This is called pass-through taxation.
- Simplicity – An LLC is relatively easy to create and operate, requiring minimal paperwork. Unlike a corporation, it is not required to formally assign officer roles, have annual meetings, keep company minutes, or record resolutions.
- Flexibility – The ownership and management of an LLC can be structured in a number of ways. You can form a single-member or multimember LLC and have it managed by members or managers. Also, an LLC may choose to be taxed as a corporation.
- More credibility – An LLC is generally considered a more formal business entity than a partnership or sole proprietorship, so it gives your business more credibility.
- Easier access to business loans – After becoming an LLC, your business can start to build a credit history, which makes it easier to get approval for lines of credit and loans.
- Minimal restrictions on ownership – In an LLC, members can be citizens of the U.S. or other countries. Also, there is no limit to the number of owners it can have.
Disadvantages of an LLC
- Pass-though taxation – Since an LLC is a pass-through entity, its members must pay taxes on its profits whether or not they receive a disbursement. In addition, members are required to wait until the company gives out K-1 forms to file their personal tax returns. This is one reason why many investors choose not to fund LLCs.
- Taxation on appreciated assets – The appreciated assets of your company may be subject to taxation if you elect LLC status for an existing business.
- Non-perpetual existence – An LLC will be dissolved upon the bankruptcy or death of its owner, unlike a corporation, which can continue to exist.
- Limited growth potential – An LLC is unable to issue shares to attract investors. It is not a suitable option if you plan to become a public company in the future.
- Lack of uniformity – Different states may have different ways of treating LLCs.
- Ownership transferability – An LLC's ownership is usually more difficult to transfer than that of a corporation.
How to Form an LLC
In most states, you only need to submit the Articles of Organization and a filing fee to the Secretary of State in order to form an LLC. The Articles of Organization typically contains the following information:
- Name of LLC
- Location of LLC
- Names and addresses of LLC members
- Name and address of your registered agent
Most states allow the Articles of Organization to be filed online or via postal mail.
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