What Is an LLC or Limited Liability Company?

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Every aspiring business owner should know more about LLC, but what is an LLC? A Limited Liability Company is a formal business structure restricted only for US businesses based on either sole proprietorship or a partnership. Under this structure, a person involved in the LLC will be able to save his assets in case the business is not making profits, submerged in business debts, or is being targeted with a lawsuit.

what is an LLC

Is Forming a New LLC Worthwhile?

Since there are several other business entities prevalent in the market, it’s a very common question whether investing time and money in opening the Limited Liability Companies are worthy or not. To be very frank, an LLC is one of the many types of businesses that have both virtues and flaws. But, somehow, its advantages are far more pronounced than the drawbacks. Also, since it’s a very simple business structure, not many legal steps are involved in starting an LLC or in running the business successfully.

Advantages of Forming an LLC

Here are the upsides of setting up an LLC.

Limited liability protection

If somehow the Limited Liability Companies get tangled into a legal suit, the owners wouldn’t have the responsibility to pay off the debts or mitigate the lawsuits, compromising their personal liability assets. With an LLC, they will be able to protect themselves and the other business assets in a legal manner and not suffer losses.

Pass-through taxation

Unlike in a corporation, the LLC owners will be taxed only once. Whatever the company profits are, the amount will straightaway go to the owners, and then it will be divided amongst them based on a certain share percentage. It is now when the individuals have to report a tax file based on their profit share percentage. This is known as pass-through taxation in this type of business. 

Flexibility and simplicity

An LLC business comes with both a great amount of simplicity and flexibility. It doesn’t require extensive legal works to start LLC offices in any US state. Moreover, one can introduce either domestic or foreign LLC business structures with just a few certifications, licenses, and authorizations. Such a business structure doesn’t need to maintain every paper works, organize meetings, and perform other such hectic jobs. As for flexibility, the LLC offices can form based on a single member or multiple members. The company can have a member-managed structure or a manager-managed structure.

Increased credibility

Another reason to consider LLC’s worthiness is the availability of chances to gain more credibility amidst the targeted customers and the partners. Moreover, you will be able to take business loans, add credit value to the business card, and build a wonderful financial report with an LLC.

Wider tax options

According to the taxation rules laid by the IRS, a single-member LLC legal entity will pay the taxes based on sole proprietorship where the individual and the business will be taxed in the same way. As for a multi-member LLC, each individual needs to submit a taxation report based on the requirement of the share of profit percentage. Apart from this, one will get several benefits on federal taxes, franchise taxes, self-employment taxes, and others. 

Limitations of an LLC

Listed here are the limitations that you may experience with an LLC.

Higher operating fees

In some of the US states, the LLC operating expenses and filing fees charged are way too high as compared to the standard levels.

Self payable taxes

For LLCs based on the sole proprietorship structure, the member will have to pay the taxes based on his profit returns, which further lessens his overall earnings.

Restrictions on member transfers

For any form of member transfer within an LLC, transfer consent will be needed, which brings delay in the performance of the business, and in extreme cases, failure.

Types of LLC

Even though all the LLCs offer the same range of benefits and deliver similar functions, there are particular factors that set them apart from each other. Here are the most common types of LLC allowed in the US based on their features.

  • Domestic LLC: This kind of LLC refers to a business whose base of operation is the same as the place of formation.
  • Foreign LLC: If an LLC opens a functional branch in some other state, apart from the state of origin, it will be regarded as a foreign LLC.
  • Series LLC: A series LLC is a special structure where a “parent” LLC will offer limited liability protection to several other “child memberships” established under the umbrella of the parent company.
  • Professional LLC: In a professional LLC, at least a few members need to have state licenses on the field in which the LLC will offer professional services.

How to Start an LLC

Starting an LLC in the US needs a set of rules you have to follow by hook or by crook. Even though the steps to form a domestic and foreign LLC are almost the same, certain differences are there in the filing process and the certifications to be owned. Here, a brief guide is explained for your better understanding.

  1. Step 1: Select the state of business

    First of all, select the state where you want to form the LLC. For a domestic LLC, the base of operations and the state of formation should be the same. As for a foreign LLC, the operational center and the state of formation of the company will be different.

  2. Step 2: Naming of LLC

    Next, you need to choose a proper name for the LLC. There are certain rules pertaining to the LLC naming procedure.
    The name must include the abbreviated or the full form of LLC.
    It shouldn’t match or coincide with any pre-existing government body.
    The name should be available and not already registered with the state government.

  3. Step 3: Choosing a Registered Agent

    Several governments and legal LLC registered agents are there, and you need to choose one from the list. This agent is your primary point of contact and the face of your LLC plan. A registered agent is entitled to handle all the works, including taxations, filing of the LLC, registrations, lawsuits, dealing with formation documents, handling legal documents, and others.

  4. Step 4: Filing of Articles of Organizations

    After choosing an agent, you need to file for the Articles of Organization or Articles of Formation document, which entails that you have a legal right to form an LLC and protect your liabilities. Here, you need to state the name along with the services, the name reservation certificate, and the filing fee. However, this filing fee varies as per the state and the legal requirements.

  5. Step 5: Creating an Operating Agreement

    An LLC Operating Agreement will bring all the members on the same page, thereby preventing any future conflicts, and also assist in personal asset protection. One of the major benefits of filing the operating agreement is that it will contain every detail about the services to be provided and the operational management of the LLC.

  6. Step 6: Getting an EIN

    The last step to form an LLC is to get the EIN number or the Employer Identification Number. This nine-digit unique ID will help you to perform all the actions related to the taxes like double taxation, personal income tax, and so on. It has a simple filing process since the number will be used for the purposes of taxation.

What Is the Meaning of a Closely Held LLC

Closely Held LLC means that the company’s shares are owned by five or fewer individuals. The company’s shares are not traded publicly.

You may have heard of the phrase “closely held corporation” but have no idea what it means. Closely held corporations are those that are owned fifty percent or more by five or fewer people. These businesses are often run by families, so there may be conflicts among the members. Closely held corporations are special because they don’t have to hold an annual meeting to vote on ownership transfer decisions. However, Florida and other states may have different definitions of “closely held corporation” than the IRS.

Unlike publicly traded corporations, closely held companies can’t issue new classes of shares or raise large amounts of capital. In addition, the pool of potential buyers may be small, so individuals who own shares in a closely held company may need financial advice. It’s best to consult a financial planner before purchasing shares of a closely held corporation. This way, if you do decide to sell your shares, you can be assured that your investment will be tax-free and that it’ll be safe.

There are a variety of types of closely held companies. The IRS has the clearest definition, requiring that more than half of the stock be owned by five individuals or fewer. A closely held company can’t be a personal service corporation, where all the owners are employees. The IRS does not keep track of how many Closely Held companies exist, but there are different kinds. In any case, it’s best to check the definition of a Closely Held corporation before deciding on its incorporation.

A Closely held company can be a great option for a small business. There are many advantages to owning a closely held business, including the ability to control its operations. Unlike a publicly held corporation, however, closely held companies can’t be sold on the public markets, which makes them a great choice for people who want to keep control over the company’s profits. You may want to seek advice from a lawyer before you decide on the right business structure for your particular situation.

Closely held corporations have a number of tax advantages over C corporations. For example, they are exempt from annual information returns and can often qualify for S corporation status, which means that all of the company’s income is passed through to the shareholders, who pay tax on that portion. And because they’re not public, you won’t have to pay double taxation. And even better, they don’t have to pay corporate taxes – making it a great option for many small businesses.

Choosing a Closely Held LLC can also benefit your business in many ways. Not only can it help you build credibility with your customers, but it can also provide you with the tax benefits of an S corp. The benefits of a Closely Held LLC are considerable, so it’s best to check with a business tax specialist for specific advice. A Close LLC is a great option if you’re planning to sell your business and need to sell shares.

How an LLC is Managed

  • Member-managed LLC: In the member-managed Limited Liability Corporation, it is the owners who look over the operations, functions, and other related departments of the company.
  • Manager-managed LLC: In this, the members will work on a veto, and a common manager from amongst the employees will be appointed who will then overlook and supervise all the functions of the LLC as per his duties mentioned in the Article of Organization.

In Conclusion

Limited liability companies are the easy to form business structures with less hassle and lesser documentation. Small businesses that have limited budgets and manpower can always go for LLCs. Not only do they have tax benefits but also they protect your personal assets. Form your LLC today with the best LLC services available in the market.

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