Limited liability company (LLC)
A Limited Liability Company (LLC) is a popular business structure in the United States that combines elements of both corporations and partnerships. One of the key features of an LLC is that it limits the personal liability of its owners, known as members, protecting them from debts and legal actions against the business. LLCs can be managed in two ways: member-managed, where all members participate in day-to-day operations, or manager-managed, where selected individuals manage the business. Additionally, LLCs can be single-member, though the rules and taxation can differ significantly by state.
Starting an LLC involves several steps, including researching state-specific regulations, choosing a unique business name, filing articles of organization, and drafting formal operational procedures. LLCs offer certain advantages, such as flexibility in taxation—members can choose to be taxed as a partnership or corporation—and the protection of personal assets. However, potential drawbacks include the complexity of varying state laws and possible higher taxes in certain jurisdictions. Understanding these factors can help business owners make informed decisions about whether an LLC is the right choice for their needs.
Limited liability company (LLC)
In the United States, a limited liability company (LLC) is a type of business structure that limits the liability of a company’s owner. Different types of LLCs are managed and taxed in different ways. Starting an LLC requires business owners to file certain paperwork, make rules, and launch the business. LLCs have advantages and disadvantages that business owners should consider before forming this type of company.
Properties of LLCs
A limited liability company (LLC) is considered its own entity under the law. Because an LLC is its own entity, it can open bank accounts and file taxes on its own. In other words, under an LLC business structure, owners do not need to use their names to do these things. Business owners who start LLCs are called "members."
LLCs are recognized in all fifty states, but the rules for creating LLCs can vary from state to state. In general, LLCs can be owned by an individual, a group of individuals, a partnership, or even another LLC. Also, certain business classifications—such as insurance companies and banks—cannot be formed as LLCs.
LLCs can be managed in two different ways. In member-managed LLCs, all of the members of the LLC help manage the company. This means the members are responsible for overseeing the company's day-to-day operations. The other way to manage an LLC is to use a manager-management style. In this form of managerial leadership, only some of the members or some outside mangers run the day-to-day operations of the company.
Single-Member LLCs
An LLC that is owned by a single individual is called a "single-member LLC." Some states do not allow this type of LLC. At the federal level, single-member LLCs cannot be taxed as partnerships. They are taxed as sole proprietorships, unless the organization requests to be taxed as a corporation. Each state has different rules about taxing single-member LLCs, but many follow the same rules as the federal government.
How to Start an LLC
Rules for forming an LLC vary by state, but starting an LLC usually requires a few important steps. Although people are not required to hire lawyers to set up LLCs, some professionals suggest that members retain lawyers to help review any official documents. The steps for forming an LLC are as follows:
- Research rules for LLCs. Since there are so many different types of businesses, owners should make sure an LLC is the best form of business for them. Owners should consider tax laws for each type of business. LLCs usually shield owners from a company's debt and other financial liabilities. If that type of projection is important, an owner may consider forming an LLC. Also, rules regarding LLCs vary from place to place, so it is important to understand the rules in the state where the LLC is being opened.
- Choose a name. Once an owner decides to form an LLC, the next step is usually choosing the company name. The name of the company must be unique in the area where the business is operating. Filing for trademark on a business name requires paperwork and a fee.
- File articles of organization. A person creating an LLC usually has to file papers called "articles of organization." This paperwork includes the name of the company and the people who will own the company. The form also includes the members' contact information. In general, filing this paperwork requires members to pay a fee.
- Draft formal procedures. Members who form LLCs are not required by law to draft procedures and rules for the LLC. However, creating official documents that include information about the company structure, members' roles, and financial arrangements can be beneficial.
- Launch the business. Launching a business will take many more steps, some of which are regulated by law. Members of LLCs must be sure to follow all state and federal employment laws when hiring employees. Also, some states require LLCs to announce their companies' openings in local newspapers. Many businesses also require certain licenses and permits, which can vary by state and region. Members of LLCs must be sure that they follow any other laws that are specific to their states.
Possible Advantages of LLCs
Limited liability of the business owner is the main advantage of an LLC. Members of an LLC are protected from debt or litigation incurred by the business. For example, if someone wants to bring a lawsuit against an LLC, the company, not its owner or owners, will be the defendant. This helps protect people who want to own a business.
Another benefit is that LLCs with two or more members (i.e., not a single-member LLC) are able to file taxes as either a partnership or as a corporation. This flexibility helps members use the tax-filing method that benefits them most.
Possible Disadvantages of LLCs
One disadvantage of an LLC is the variation in laws. Laws for LLCs vary from place to place, which can make opening and operating an LLC confusing. It is important to understand all the laws that apply to LLCs where the company is located.
Even though LLCs have some taxation benefits, they also have some disadvantages. One of these disadvantages is that in some states, LLCs are charged more taxes than other types of businesses. Some LLCs avoid this issue by filing taxes as a corporation.
Bibliography
"Choose a Business Structure." U.S. Small Business Administration, 1 Nov. 2024, www.sba.gov/business-guide/launch-your-business/choose-business-structure. Accessed 15 Nov. 2024.
"Limited Liability Company (LLC)." Internal Revenue Service, 8 Oct. 2024, www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc. Accessed 15 Nov. 2024.
Sadulski, Jarrod. "How to Start an LLC and the Different Steps to Take." American Public University, 16 Apr. 2024, www.apu.apus.edu/area-of-study/security-and-global-studies/resources/how-to-start-an-llc/. Accessed 15 Nov. 2024.
"Single Member Limited Liability Companies." Internal Revenue Service, 22 Aug. 2024, www.irs.gov/businesses/small-businesses-self-employed/single-member-limited-liability-companies. Accessed 15 Nov. 2024.
Steingold, David M., and Amanda Hayes. "Member-Managed LLCs vs. Manager-Managed LLCs." Nolo, 14 Apr. 2022, www.nolo.com/legal-encyclopedia/member-managed-llcs-versus-manager-managed-llcs.html. Accessed 15 Nov. 2024.
"What Does It Mean to Be an LLC?" LegalZoom, 21 Mar. 2024, www.legalzoom.com/knowledge/limited-liability-company/topic/limited-liability-company. Accessed 15 Nov. 2024.