Limited liability companies are a business structure in the United States that allows the owners to avoid personal liability for the debts of the company. Limited liability companies are a combination of the different aspects of partnerships, sole proprietorships, and corporations. An LLC can offer you different taxation options, as well as methods of how you make decisions, or how you divide profits and losses.
One of the main benefits of an LLC is avoiding personal liability for your business. Especially if your business is a sole proprietorship or a partnership, then you and your business are legally considered to be the same. This means that without the protection of an LLC, your business debts become your personal debts.
Even if your business partner or employee is accused of negligence, your personal assets can be at risk. An LLC limits this liability and keeps your personal assets separate from the business.
Another reason to form an LLC is that you can choose how you want to be taxed. This means that even though LLCs do not have their own federal tax classification, they can choose between four options: sole proprietorships, partnerships, S corporations, or C corporations.
LLCs are always able to take advantage of “pass-through” taxation which means the LLC will not need to pay any LLC taxes or corporate taxes. With an LLC, the income and expenses pass through to the personal tax returns of each owner. Then the owners will pay personal income tax on their personal profits.
Although S corporations are able to enjoy pass-through taxation, they have many restrictions (such as not being able to have more than 100 shareholders). LLCs are more flexible and can obtain pass-through taxation without any restrictions.
Additionally, as compared to corporations, LLCs do not have a formal structure. There are more choices for LLC owners regarding how the business is run, and how decisions are made.
LLCs are able to distribute profits to owners however they choose. Even if two owners have equal ownership, they can agree to distribute the profits however they choose, for example, 20/80 or 60/40. Corporations must distribute profits to shareholders according to the number or types of shares held.
If you so choose, when forming your LLC, you may elect a person or company as the registered agent. This will allow you to keep your name separate from your business, thus protecting your privacy.
Even though corporations also offer limited liability, there are many requirements and rules. Corporations must hold annual shareholder meetings, make annual reports, and also pay annual fees to the state. LLCs are not required to hold meetings or keep extensive records. In many states, LLCs are not even required to file annual reports.
Although forming an LLC can be an incredible choice for your business, it can also have a few disadvantages as well. These disadvantages include:
LLCs are great for businesses who want all owners to enjoy the limitation of liability, and to allow all owners to participate in managing the company. You may start an LLC if you want the option of taxation as a corporation, but to be able to elect taxation as a partnership or sole-proprietor as well.
Some professions that tend to operate as a professional LLC would-be lawyers, doctors, architects, engineers, accountants, and chiropractors.
An LLC Agent can help you understand whether or not an LLC is the best legal option for your business. On top of that, a business lawyer can help you to actually establish your LLC and help you define the structure of it. This includes the financial and management structure of the LLC as well. If you are considering forming an LLC for your business, contact us to learn more about how we can help you during the formation process of your LLC.