What Type of Entity Is an LLC?: Everything You Need to Know
An LLC is a hybrid business structure that offers its owners the same liability protection corporations enjoy while retaining some flexibility.3 min read
What type of entity is an LLC? The first limited liability company (LLC) was formed in the late 1970s to give small business owners the flexibility to run their business as they wanted while giving them liability protection. In the mid-2000s, the LLC business structure was the most popular type of business structure, superseding the corporate entity. LLCs remain a commonly used structure for business owners.
What Is a Limited Liability Company
A limited liability company is a hybrid business structure that offers its owners (called members) the same liability protection corporations enjoy while having the flexibility associated with a sole proprietorship or partnership. LLC features include the following:
- Pass-through taxation
- Liability protection
- Organizational structure flexibility
- Discretion in member-interest distribution.
While LLCs come with many benefits, there are a few caveats. Understanding your business needs will help you pick the right type of setup.
Types of LLCs
An LLC's characteristics are based on several factors, including location, member count, management structure, association with other entities (such as members and corporations), restrictions, and anonymity.
- Domestic LLC vs. Foreign LLC. If you operate your LLC in the same state where it was formed, then you have a domestic LLC. On the other hand, if you created your LLC in one state and run your business in a different state, then you have a foreign LLC.
- Single-Member LLC vs. Multi-Member LLC. If you are the sole owner of your LLC, then you have a single-member LLC. If you have partners, then you have a multi-member LLC.
- Member-Managed LLC vs. Manager-Managed LLC. Most LLCs are member-managed. This means that that all members help run the business operation. If an LLC is manager-managed, it means that at least one of its members are not involved in the day-to-day business operation. LLCs members can also hire a non-member to manage the business.
- Series LLCs. These LLCs act has a master LLC for other entities.
- Restricted LLCs. These are not as flexible as regular LLCs. Restricted LLCs are only available in Nevada and are limited in the member distributions they can make in the first ten years.
- L3Cs. L3Cs are hybrid structures that combine the legal and tax flexibility of LLCs with non-profit social benefits.
- Anonymous LLCs. With anonymous LLCs, ownership details are not made public.
Advantages of Starting an LLC
The LLC structure was formed so that business owners could have liability protection without the corporate hassles. The benefits associated with creating an LLC are a direct result of that goal. The following are some of these advantages:
- Pass-through taxes. LLC members do not have to report taxes for the LLC. Instead, members report their portion of profits and losses on their tax returns.
- No residency requirements. You need neither U.S. citizenship or permanent residency to start a business.
- Limited liability protection. An LLC structure protects LLC members from personal liability for the business debt.
- Ownership flexibility. An LLC can own other corporations and LLCs.
- Versatile tax treatment options. An LLC, by default, is treated like either a sole proprietorship for single-member LLCs or a partnership for multi-member LLCs. However, members can opt to tax their LLC like a C corporation or an S Corporation.
- Flexible profit distribution. Member profit distribution does not have to match their ownership percentage in the company.
- Informal structure. LLCs have fewer regulations than a corporation. They are not required to have formal meetings, nor are they mandated to keep meeting minutes.
Disadvantages of Starting an LLC
LLCs may not be as cumbersome to start as a corporation, but they come with some drawbacks, including the following:
- Limited growth. LLCs cannot issue shares of stock to raise money.
- Payroll taxes. LLC members are subject to payroll taxes, which are higher than corporate dividend taxes.
- Termination risk. LLC members must make sure they separate their business transactions from their personal dealings. If there is not a clear delineation between your personal finances and the LLC's, your LLC structure is subject to termination.
LCCs are hybrid entities that minimize the barriers to setting up a sound business. While it is simple to set up, you need to understand the various characteristics so that you set up an LLC that suits your business needs.
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