What’s an LLC?
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Intuit’s 2021 New Business Insights Report predicted 17 million new small businesses in 2022, a third consecutive year for entrepreneurship. In March this year, the United States saw 4.53 million workers quit their jobs.
Could the Great Resignation lead to a small business revolution?
Yes, absolutely.
And if you’ve found yourself on this blog, you’re likely trying to figure out how to take your small business ideas and make them a reality in the more formal sense. You’ve come to the right place, so read on to learn about Limited Liability companies and why you should consider forming one.
What's an LLC?
An LLC or Limited Liability Structure is a business entity with one or more people own, who are also called “members.” For example, the Limited Liability Company members have similar roles with equal participation in managing the business. However, the members can also elect an alternative management structure. Some might even refer to this other management structure as “manager management.”
LLC or Limited Liability Company refers to a corporate structure designed to protect the business owners. By forming an LLC, the owner can stay protected from the personal responsibility of the company’s claims and debts.
In other words, members of the LLC can reduce the risk of creditors coming after their possessions, like cars or houses. So if a business cannot pay a creditor in time, it can rest easy knowing that its possessions are safe.
Understanding a Limited Liability Company
Since it provides more protection and flexibility to its investors, LLC is a popular choice among business owners. The state statutes permit LLCs, while the governing regulations of a Limited Liability Company vary from state to state. Ideally, business owners should check in with their state if they’re interested in starting a Limited Liability Company.
Most states do not have a restriction on ownership. So, corporations, foreign entities, individuals, and other LLCs can all become LLC members. However, a few entities, such as insurance companies and banks, cannot form LLCs.
Limited Liability Companies are business arrangements that require articles of organization (a formal legal document at the state level). Business owners must file this official document with the state when forming an LLC.
LLCs can also choose to elect not to pay federal taxes directly. This way, the losses and profits get reported on the LLC owners’ tax returns. A Limited Liability Company can choose different classifications; for example, a corporation. In this case, the creditors will go after the members if they detect fraud or if the LLC fails to meet its requirements.
Forming an LLC
As already mentioned, an LLC’s requirements and regulations vary by state. However, all Limited Liability Companies still have some similarities.
When forming a legal LLC, the owners or members of the company start by choosing the name. Once done, they can move ahead with making the documents for the articles of organization and file them with the state.
The articles of organization exist to establish obligations like rights, liabilities, and duties for each LLC member. These documents also include other necessary information like personal details of the owners, including their addresses and names. Don’t forget that they also contain the business’ state of purpose and the name of the registered agent of the LLC.
The LLC members file the articles of the organization directly with the state and pay a certain fee. The owners are also required to submit the paperwork and some additional fees at the federal level. In doing so, the LLC obtains an EIN (employer identification number).
Getting expert advice when formally creating a business is crucial. For that, we highly recommend the team at Northwest Registered Agent that can support your business filing journey in all 50 states.
Limited Liability Company vs. Corporation
Limited Liability Companies either get taxed as a sole proprietorship. Moreover, the members are not employees of the LLC. Instead, the members are the business owners themselves.
On the other hand, shareholders of a corporation have the same corporate responsibilities as the employees. Owing to the tax requirements, two types of corporations exist- S Corporations and C corporations. We go over these next:
C Corporation:
A separate tax-paying entity with its tax rate reaching approximately 21%.
S Corporation:
A pass-through entity, meaning the taxes first pass through the business. Then, the company pays taxes according to the individual rates of each shareholder.
Should You Form an LLC?
You’re probably reading this if you’re in the early stages of starting a small business or are currently running one. Forming an LLC allows business owners to limit their personal legal liability.
Business owners can use LLCs to own and run almost all types of businesses. However, some states require a few professionals to form special professional LLCs. Don’t forget that LLCs are suitable for companies of all sizes. Anyone can create a Limited Liability Company from individual to multiple owners, and LLCs are the most common commercial and rental property entities.
Benefits of LLCs
LLCs are becoming popular among business owners, so it’s worth looking into the perks of forming a Limited Liability Company. We list a few reasons why in the next section.
Personal Asset Protection
Personal asset protection is one of the best benefits of forming an LLC. A Limited Liability Company limits liability of its owners and protects your personal assets in the event any legal issues within the business arise. When the owners are not personally liable, the creditors can’t file a lawsuit to collect their personal possessions.
Pass-Through Taxation
As in an S Corporation, the LLC provides its owners with the benefit of pass-through taxation. First, the losses and profits pass through the business and reach the owners’ tax return. Then, they get taxed according to the personal tax rates of the owner(s).
Ownership Flexibility
Ownership of a Limited Liability company does not limit the number of owners they can have. An LLC can even have a single member, while the maximum number of owners can increase significantly.
Simplicity
Over time, more business owners realize that Limited Liability Companies are one of the simplest business entities to exist. LLCs are easy to form and run, unlike other types of businesses. These companies do not necessarily require directors and officers. It is also free of other administrative formalities and burdens like board meetings.
Bottom Line
An LLC or Limited Liability Company provides a business structure for private business entities in the US. It is fair to say that LLCs combine corporations and partnerships. Offering liability to the business owners (called members), LLC protects their assets and possessions, such as the individual’s cars and houses.
Not to mention, an LLC is simple and easy to start. Business owners only need to prepare the articles of organization and file them with the state. Regulatory requirements for LLCs will always vary from state to state.
