What Type of Business Is an LLC?
What type of business is an LLC is a common question when setting up a new business and choosing a business structure. An LLC is a limited liability company.3 min read updated on February 01, 2023
What type of business is an LLC is a common question when setting up a new business and choosing a business structure. An LLC is a limited liability company. It's a business structure that delivers the limited liability corporations enjoy with the pass-through taxation advantages provided by sole-proprietorships and partnerships.
Separate but Still Connected
As limited liability companies, LLCs have emerged as a popular type of business for startups because they're simpler to operate than a corporation. As an LLC, a business exists as a separate entity from its owner. This includes incurring separate debts and existing as its own entity for legal purposes. In taxation, however, an LLC is still tied to the owner's personal tax debt.
The term "member" is used to describe the owner or owners of an LLC. A single member is enough to operate an LLC, or multiple members may participate in the organization if preferred. Many business owners opt for the LLC business structure because of the limited liability protection it provides while not adding a level of formality and complexity to operating procedures. An LLC might be the ideal business setup if you:
- Have no plans to raise investment money for the business
- Want to add a cushion of safety around your personal assets
- Prefer a higher level of flexibility in managing the business and handling taxes
Businesses That Can and Can't Form LLCs
Businesses of all sizes are able to enjoy the advantages of forming an LLC, and many entrepreneurs make the decision that an LLC structure is the one that is ideal. These include businesses like financial advisors, personal trainers, real estate agents, solopreneurs and even unexpected businesses like marijuana companies.
Businesses that are blocked from forming LLCs include financial companies like:
- Insurance agencies
- Financial trust companies
Also, in different states like California, there are certain industries where LLC business types are not permitted. These include:
- Licensed health care providers
Six Popular Advantages of the LLC Business Format
While there are numerous advantages to this business format, six of the most popular reasons to form an LLC include:
- Limited Liability Protection: This means the business, as an entity, is held responsible for business' debts and liabilities instead of the LLC's members. The liability of an LLC's members only includes the amount they have personally invested in the business, so their personal assets are separate from the business entity and therefore protected.
- Pass-Through Taxation: The net income, or the loss, from an LLC is passed through the business entity and onto the LLC members where it is taxed as if it were personal income.
- No Restrictions on Ownership: There are no citizenship or residency restrictions on LLCs, and even other corporate entities may serve as LLC members.
- Tax Status Is Versatile: LLCs are taxed as either a sole-proprietorship or a partnership by default, but the members can choose to tax it as a C-corporation or an S-corporation if preferred.
- Profit Distribution Flexibility: An LLC's net income or profits can be distributed to its members on proportions that vary from their percentage of ownership.
- Minimal Requirements for Compliance: An LLC is different from a corporation, with fewer compliance requirements, because it isn't necessary to meet the stringent requirements corporations must meet.
Four Common LLC Disadvantages
Four of the common drawbacks to forming an LLC are:
- Must pay self-employment taxes: There are occasions when personal income taxes are higher than corporate taxes.
- Need to keep detailed personal records: This is to ensure your personal and business funds are kept separate, and ensure limited liability is maintained. Things like a separate business and personal bank account to track expenses are vital.
- Termination of the LLC: There is no option to quit. If a member leaves an LLC, it ceases to exist.
- Bank fees: Banks typically charge higher fees for business accounts. SO, in addition to paying fees on a personal account, there are additional, higher fees for the business one. It's also noteworthy that when a customer addresses a check to an LLC, you can't simply cash it. It is required that a check made out to an LLC be deposited, and some banks charge extra for the service.
If you need help with deciding if an LLC is the right type of business for your company, 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.