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.
On this page, you’ll learn about the following:
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.
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.
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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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
What Is the Meaning of a Closed-Held LLC? This type of business entity is limited to 35 shareholders, which restricts the sale of shares. Such entities are ideal for family-run businesses with a small number of employees. They are not required to hold annual meetings and are not governed by state or federal laws. As such, the meaning of the term varies from state to state.
A closely-held company is a business that is closely held by a small group of owners. Its shares are owned primarily by the minority shareholders. There is a higher risk of litigation as the majority shareholders do not have a say in the business. In addition, these businesses are less susceptible to public market fluctuations. Furthermore, they are more likely to have a close relationship between workers and owners, which means that the company’s workers are less likely to be affected by layoffs and other corporate governance issues.
There is no exact definition of what constitutes a close-held business. Its name refers to a company that is privately owned. Most small businesses are closely-held. It is not a rule that size matters, since some large companies are closely-held. Some of the largest businesses are even family-owned. In fact, the Koch family owns more than 60% of Koch Industries, a $60 billion company.
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.