In terms of various aspects, an LLC company is somewhat in between Corporations and Sole proprietorships and is considered a Hybrid Entity. An LLC Business has “Limited Liability protection,” usually available for a Corporation business structure, whether it is a C-corp or an S-corp. However, an LLC business has a simple system with no shareholders or heavy regulations, just like a Sole proprietorship. Read more to learn about, What is an LLC and how does it work?
What does LLC mean?
An LLC refers to a Limited Liability Company. It is one of the most chosen Legal Business structures in the United States. After opting for this entity structure, the business owners get relieved of the personal responsibility for the Business’s liabilities or losses. It means the Limited Liability Company acts as its own independent legal entity.
In simple words, in case of any legal dispute or even Bankruptcy with the Business, the bank or any lender cannot access the LLC owner’s personal assets, bank accounts, etc. Therefore, Limited Liability Protection marks a clear boundary regarding the Business owner’s personal belongings from the company assets.
How do LLCs work?
Basically, the state authorities handle all the LLC companies established in the state. Therefore, the regulations for these LLCs vary as per their state.
Single or multiple owners can own an LLC. These LLC owners are called “members.” An LLC has a single owner, considered a “single-member LLC.” Similarly, an LLC with multiple owners is a “multi-member LLC.”
Here the owners or members can be individuals, foreigners, corporations, international entities, and even other LLC companies. Regardless of such freedom, not all entities, such as insurance and bank companies, can hold ownership of LLCs. They have that right.
How Are LLCs Taxed?
As already mentioned, an LLC can be a “single-member LLC” or a “multi-member LLC.” An LLC’s taxation criteria depend on which category the LLC falls into, single-member or multi-membered.
Assuming an LLC is a Single-Member LLC, it will be taxed as a Sole proprietorship, which means the owner or member doesn’t need to report tax returns to the IRS. The owner just needs to file the profits in his/her personal tax returns.
If an LLC is a Multi-Member LLC, the IRS will consider the company’s business structure as that of Partnerships. Similarly, co-owners or members of LLCs don’t need to pay Income tax. However, they must pay their individual tax based on the Business’s share of profits.
Only a few might know that, in order to reduce personal taxation, LLCs have the Liberty to switch their tax method to a corporation.
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What are the types of LLCs?
Other than being classified based on the number of members, LLC is categorized as follows:
Domestic LLC
It is the most common type of LLC. The LLC located and registered in the same state is a “domestic LLC.”
Foreign LLC
It is the most common type of LLC. The LLC located and registered in the same state is a “domestic LLC.”
Professional LLC
Businesses related to health or Legal practice etc., in brief, the companies that provide professional services in the United States, must register as a “Professional LLC ” with the state. The Professional LLC must have the required permits and Licenses. The LLC members must meet qualification and certification criteria to carry out Business as a Professional LLC. It is essential to consult a legal counselor and get acknowledged with all the facts. In the case of Professional LLC, personal liability protection doesn’t protect from situations like professional malpractice claims.
Series LLC
It is one of the most profitable types of LLC for a business owner to choose. Registering an LLC as a “Series LLC” provides Security across the series of “child” businesses along with the single “parent” LLC. Here Security represents Limited Liability Protection. Series LLC registration is available only in the following states in the United States:
- Alabama
- Delaware
- North Dakota
- Nevada
- Texas
- Oklahoma
- Tennessee
- Washington D.C.
- Illinois
- Indiana
- Iowa
- Kansas
- Minnesota
- Missouri
- Montana
- Utah
- Wisconsin
What are the benefits of Choosing an LLC?
★ Limited Liability Protection:
As already mentioned, LLC provides limited liability protection to its owners. LLC owners are personally immune to LLC lawsuits or debts. Creditors cannot collect LLC owners’ personal assets to compensate for incurred losses in the Business.
★ Pass-Through Taxation System:
Pass-through taxation is a taxation system in which an LLCs income is taxed just once. All the LLC earnings are distributed among the LLC members, and the LLC members are meant to be taxed based on the share of their business profits. So, the profits are passed through and taxed only once by the owner’s end. It is a lot better than the “double taxation” scenario of C-corp, under which, before the owner’s tax deductions, C-corp itself pays the tax return on its profits.
★ Ease:
LLCs don’t have a complex structure with no need to form a team of board members, record every detail of the company’s actions and hold annual meetings. With equal access to Limited Liability Protection, LLCs, Unlike corporations, are easy to file, and even their maintenance needs bare minimum paperwork.
★ Flexibility:
There is no such rule that declares that an LLC can have a particular number of members, and LLCs are pretty flexible in that sense. LLC can be one, two, or any numeral member. Multi-member LLCs can also hire a manager for LLC administration.
★ Tax Options:
LLC has the Liberty to choose almost any taxation system. Although, while switching the taxation scenario, most LLCs prefer opting for S corp tax designation.
★ Hype Authenticity:
For sure, registering a company as an LLC with the state marks the Business’s authenticity in the market. It helps raise a company’s credibility over sole proprietorships or partnerships. Once the LLC term links to a company name, it helps the Business on so many levels.
★ Easy Business Loans:
An LLC-registered company can easily build its transaction history. With such sorted business credit status, lenders or banks can easily understand the Business’s financial position and give loans.
Disadvantages Of An LLC
It is evident that an LLC offers several benefits, but we cannot rule out its few disadvantages too. Some of them are mentioned as follows:
- Whether or not the LLC Members get disbursements, they must file taxes from their share of the LLC’s income.
- LLC should send K-1 forms to all the LLC members to submit their taxes. Without them, LLC members cannot file their taxes.
How To Form an LLC in the United States?
To form an LLC, make sure to follow the below-mentioned steps:
- Pick up the state and exact location of the Business.
- Pick up a name for the LLC Company.
- Hire a Credible Registered Agent.
- Prepare an LLC operating agreement that divides the functional duties among the members of the LLC.
- Register the company with the chosen state by filling and submitting the Articles of Organization, also called Certificate of Organization, or a Certificate of Formation with the secretary of state’s office.
Click here to understand the complete process to register the company in the United States.
LottaLegal registered agents can be advantageous while registering LLCs with the state. Registered agents just require basic business details to register the Business in no time.
Jason Currie
Author
After hustling for ten years as an attorney, now, Jason Currie has dedicated his life to his one and only love, writing. He writes pieces on finance, business, and taxation for entrepreneurs and small or large businesses using his former proficiency in legal works. Last year, he even published one more volume of his highest-selling book regarding ways of increasing income, which was a huge success. Currently, he is living with his wife and three daughters in Los Angeles.
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