If you are thinking about starting a business or are part of any legal business, you might have heard of an LLC and wondered what it means. Or you might be wondering why you need an LLC? An LLC stands for a Limited Liability Company and is one of the ways that a business can register itself. By registering as an LLC, the business is telling the government about its business structure, financial responsibilities, and information for tax purposes.To give you a better understanding of what an LLC is, this article will break down LLC in terms of business characteristics and describe some of the advantages and disadvantages of forming an LLC.
What is a Limited Liability Company (LLC)?
A limited liability company (LLC) is a type of business ownership structure that exists in the United States and other countries like Chile, Colombia, Italy, India, Japan, Switzerland, and the U.K. LLC companies are hybrid entities that, to some degree, combine elements of partnerships and sole proprietorships. A company that is LLC will allow owners and other investors to not be personally liable for any debts or liabilities that the company incurs. Therefore, a company usually wants to be protected under the limited liability legal structure so that the owner’s private assets aren’t at risk in case the company fails, an aspect that encourages investors to invest in that company. LLC protects the assets of owners, investors, or shareholders so that they aren’t seized in case of bankruptcy. For example, a company’s stocks are considered an asset and can be seized in the case of company insolvency. Other assets include real estate, equipment, machinery, and investments made in the name of the entity. Registering as an LLC puts the business into a protected legal and tax bracket. This bracket secures the private and personal assets of investors, owners, and shareholders from any corporate losses that the company experiences. For example, if an LLC company fails, only the company assets are at risk for debt obligations and bankruptcy. This means that their liability is restricted only to the amount that a shareholder or investor had in the company, and limits the seizure or liquidation of any of their personal assets.
Understanding Limited Liability and Types of LLCs
Regulations surrounding LLCs will vary from state to state (or provincially in other countries). In general, owners of an LLC are called members and states won’t restrict an LLC’s ownership. Anyone can be considered an owner, including an individual, corporation, as well as foreigners and foreign entities, and other LLCs (although banks and insurance companies cannot own an LLC).Since an LLC is a formal partnership arrangement, it requires that Articles of Organization that outline the governance of the business are filed to the state. There are different types and levels of limited liability stipulations that businesses can register as. An LLC is a type of blended partnership but you can also have limited liability partnerships. A partnership can also be registered as a limited liability (i.e., Limited Liability Partnership) if additional partners (or Limited Partners; LP) involved in a business want to protect each of their personal assets. In a limited liability partnership, partners who decide to join a business can have limited liability whereas general partners (those who own a company and are actively involved in the day to day) will have unlimited liability. Any company or individual can operate as an LLC. If an individual is operating under an LLC, it is recognized as a single-member LLC. In this structure, owners are treated as members. For tax purposes, single-member LLCs are considered to be “disregarded entities” and are ignored for tax purposes. The IRS will collect business taxes through the owner’s personal tax return and do not need to file a separate business tax return. A business can operate as a sole proprietorship but they take on all of the company’s liabilities. For these reasons, a single-member LLC is far more expensive and requires much more paperwork compared to a sole proprietorship but is easier to set up compared to a corporation.
Advantages and Disadvantages of an LLC
There are clear advantages to forming an LLC. Many outside investors prefer a company to be an LLC so that their personal assets are not affected by the company’s ongoing operations except for when the company profits. Without being an LLC, it may be difficult to ask for investors to sign on to a project. You might also have limited public shareholder interest. Other benefits include malleability when it comes to taxes. LLCs may opt to not pay federal taxes and instead, profits and losses are listed on the personal income tax returns of the owners. One of the biggest disadvantages is its organization as a business, which needs to be carefully detailed in the Operating Agreement. If one of the members dies or goes bankrupt, then the continuation of powers need to be documented in the LLC Operating Agreement.
Forming an LLC
When forming an LLC, look first to your state’s requirements. Individual state requirements for forming an LLC will vary. In general, though, you will need to decide on a name and file Articles of Organization that describe your new LLC’s governance structure.You’ll also need to create an LLC Operating Agreement, which will be used by the members of the LLC to establish the obligations of each member, such as their individual powers, rights, liabilities, and duties. The LLC Operating Agreement does not need to be filed to the state, but it is important to finalize this information to avoid confusion later on.Once the Articles of Organization and other required paperwork has been filed with the appropriate state authorities, you will have to pay a fee. You’ll also need to submit paperwork and fees on the federal level in order to receive an employer identification number (EIN).
Getting Started with Your New LLC
If you’re considering registering as an LLC, it can be daunting to pick a name, file the paperwork accurately, and complete the other required steps. With NewLLC’s step-by-step guides to setting up a business, including how to register as an LLC, create a website, set up an email, and more, you will be quickly on your way to operating as an LLC. If you’d like to avoid setting up your LLC on your own, Northwest Registered Agent can help set this up on your behalf.