An LLC is an abbreviation for a Limited Liability Company. An LLC is an even more formalized partnership agreement that requires more documents of the organization to be submitted to the state in which you will register your business.
If you wonder what is an LLC, then it is usually much simpler to set up than a sole proprietorship and offers more protection and flexibility to the owners of a business. However, despite the advantages of LLC offers, they have become a subject of much discussion among legal experts due to the prevalence of LLCs and their benefits and drawbacks. The purpose of this article is to provide you with a brief introduction to LLCs and the issues that they are addressing with their formation.
For many people, an LLC stands for Limited Liability Corporation. When LLC forms, owners can divide their liability and ownership of their business between them as if they were corporations. This allows them to separate personal assets from those of their business and limit themselves to their earnings and losses as closely as they can while maintaining limited liability. This has some advantages. It is the most simple form of incorporation since there is no need for shareholders or voting meetings and no need to report audited financial information.
Besides limited liability, a Limited Liability Company can be a good choice because of the limited liability it allows its owners to enjoy. Individual shareholders cannot be held personally liable for the company’s debts unless they are part of the LLC. If a shareholder engages in conduct that would constitute a breach of his or her fiduciary duty as a corporate citizen, the shareholders are only personally liable for that particular duty. As long as the law does not prevent the shareholders from recouping their losses, they can seek damages from the owner of the company. If the court decides that the breach of fiduciary duty did not cause actual damage to the company, the shareholders are fully protected. An LLC also provides the advantage of allowing the owners to avoid double taxation on income by using the personal credit of the LLC as the sole financing source.
One of the advantages of incorporating an LLC rather than incorporating it as a corporation is the ease in which it can be organized. Unlike corporations, an LLC filing is relatively quick and simple. In addition, many states allow for the same simplicity and expediency in incorporating an LLC as a corporation filing. Although an LLC may appear on the books of the United States as a separate entity from the owners of the business entity, it does not have all of the same tax benefits afforded to C corporations or LLCs. Forming an LLC is often the preferred choice for small business owners looking to incorporate it in a short amount of time.
There are some differences between an LLC and a corporation. An LLC filing typically does not provide protection from lawsuits filed by individual shareholders. Owners are liable for their own taxes and cannot collect corporation tax off of their LLC unit. The IRS treats an LLC like any other kind of company, meaning it has its own IRS identification number and tax status. In some cases, an LLC may be treated as a pass-through entity, which allows the owners to report the business as having no income or liability for tax purposes.
Many small business owners mistakenly believe that an LLC is similar to a sole proprietorship. While both entities have the same tax status in the eyes of the IRS, an LLC has some distinct advantages. A sole proprietorship is formed by a single person and is considered to be a partnership. LLCs can only be formed by two people, so they are essentially self-employed individuals. An LLC is different because it is formed by a group of owners who agree to operate as one entity.
Forming an LLC differs slightly from forming an S-corp, but there are similarities. Both require that the owners name a legal entity and file their articles of association with the Secretary of State. However, unlike an S-corp, new business owners cannot use double taxation to take advantage of an LLC. This tax benefit is available only to those owners who have chosen not to be taxed as an individual on their personal income tax return.
Forming an LLC is much like registering a corporation. Business owners must designate an agent to act as the company’s registered agent. The registered agent should also complete an LLC Operating Agreement, which is required by all states whether or not an LLC has a state tax ID number. An LLC Operating Agreement includes all of the technical and detailed information about the LLC such as its capital, debts, management, and other important information. All business owners should read their LLC Operating Agreement before signing, but the most important section is the paragraph relating to membership. All business owners should also review their Articles of Organization and update them as needed to include any additional members, LLC decals, and any other details that make the LLC separate from any other business entity.