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A Complete Guide to a Limited Liability Company (LLC)
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A Complete Guide to a Limited Liability Company (LLC)
It’s a big responsibility to choose the best entity for your business. The business model you choose impacts taxes, management and legal requirements. Yet, with multiple options, it can be difficult to make the best choice for your business. To start, focus on comparing some important aspects, like formation costs, taxation and the management or shareholder requirements.
The business entity LLC meaning limited liability company is a great option for small business owners for growth, protection and credibility. But with any business entity, there are certain protocols and requirements to follow when forming an LLC. Rest assured, we’ll cover all your pressing questions, including: what is an LLC business, what does LLC mean, how does an LLC work and what does LLC stand for.
Table of contents
What is an LLC and how does it work?
An LLC is a type of business entity that is a combination of a sole proprietorship and a partnership. Like a corporation, an LLC can have a bank account, buy property and hire employees.
One perk of an LLC company is that it offers liability protection. So if your business faces debt or legal trouble, you’re personally protected and your private assets are safe.
The owner of an LLC is called a member. LLCs can have only one or multiple members owning different percentages of the business. Even though more than one person can own it, someone cannot buy their way into becoming an owner. So with an LLC, you can’t sell any stock like you can with a corporation.
Some famous LLC examples include Hertz, Sony, Nike, eBay, IBM and Amazon.
Now let’s answer the question, how does an LLC work?
The members, or owners, share in the profits and losses of the business. You don’t need an operating agreement, which defines the responsibilities and investor percentages, to start an LLC.
The management of an LLC varies depending on the company’s size or structure. Managers could include all the members, a committee made up of members or a non-employee that’s hired for the role. When it comes to voting rights, this depends on the amount of capital investments the member holds. Members can also sell or give their portion of the company’s interest to someone else. But this matter needs to be voted on first.
One important requirement you’ll need when forming an LLC is the articles of organization. This outlines how your business will operate, including the management structure, business type and financial details. You’ll also list the names of all the owners or members, the name of the registered agent and the company address and name.
You’ll also need to fill out Form 1065, which is used to report your LLC business’s profits, losses, credits, income or deductions of your LLC business.
What does LLC stand for?
The LLC meaning is limited liability company. The limited liability company definition is a company in which the owners are only responsible for debts that match the invested capital. So let’s break down the question, what does LLC mean? Limited liability is a legal structure where private assets are protected if the business fails, or has debts or lawsuits. So as the business owner, you aren’t held personally responsible for business debts.
Is an LLC a partnership?
You might be wondering, is an LLC a partnership? Although they both offer pass-through taxation, LLCs and partnerships have distinct differences.
Why start an LLC company?
When it comes to small businesses, limited liability companies are the best option for certain reasons.
Credibility
Affordable
Flexibility with taxes
Liability protection
Simplicity
LLC vs S Corp
Limited liability companies and S corporations have some things in common, but they also have significant differences.
Let’s start with the similarities. Both entities offer limited liability protection, meaning individual business owners aren’t held personally responsible for any debts or liabilities. Also, both are considered entities that are separate and pass-through. A separate entity needs to be started at the state level and pass-through entities don’t pay any taxes at the business level. LLCs and S Corps have to follow certain state regulations like appointing a registered agent and paying annual fees.
Now onto the differences between LLCs and S Corps. LLCs can have unlimited members, whereas S Corps can only have up to 100. With an S corporation, all the shareholders must be U.S. citizens, but LLCs have no restrictions. They also can’t be owned by an LLC, corporation, partnership or most trusts. But S Corporations have officers and directors to help oversee business affairs and handle any big decisions.
Regarding taxes, S corporations can consider the owner an employee, saving on self-employment taxes. LLCs must pay self-employment taxes on their income because they’re taxed on a personal income level and not a business level.
LLC vs C Corp
When it comes to comparing an LLC vs C Corp, each has advantages to consider. For example, both companies limit the liability of owners when it comes to company debt. Both can also own other companies and get banking services.
LLCs are often chosen for side projects, small teams or businesses unsure of their long-term business goals. This is because money and intellectual property (IP) can freely flow between the LLC itself and the LLC members without tax implications. Although possible with a C Corp, this route requires you to keep extensive records. But C Corps are attractive to investors because of the tax structure, business management and ownership.
When choosing a business entity, the taxation process plays an important role when making decisions. C Corps file their own taxes and are taxed twice. The company pays corporate taxes, and the owners are taxed when they receive profits or salaries. An LLC is considered a pass-through entity, meaning the income is reported on personal tax returns.
LLCs can choose to be treated as a C Corp, but they will be subject to double taxes. Whether you decide an LLC or C Corp is right for your business, both have pros and cons to consider.
LLC vs Sole Proprietorship
LLCs and sole proprietorships are two of the most common business structures. Sole proprietorships require minimal paperwork, making it the simplest option. On the other hand, forming an LLC company involves a lot of cost and paperwork upfront. But choosing an LLC over a sole proprietorship can protect you from liability and help your business grow.
There are a few distinctions when comparing an LLC vs sole proprietorship. When you operate a sole proprietorship, there is no distinction between the business owner and the business. So there’s no need to have a separate bank account or credit card, but having a separate account could make it easier to track business expenses.
But with an LLC, everything needs to be separate, including your bank account and credit card, since you'll be making purchases and signing documents or contracts on behalf of the business.
When it comes to taxes, the IRS considers sole proprietors as self-employed. So you’ll list all business expenses on Schedule C. But limited liability companies are treated as self-employed sole proprietors with an option to be taxed as a corporation. So the owner can opt to be considered an employee of the company.
It’s up to you to make the best decision for your business. Starting an LLC requires time and money, so be sure to make your decision with these considerations in mind.
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