What is an LLC?- Definition, Pros, and Cons

What Is a Limited Liability Company (LLC)?

A limited liability company (LLC) is a business structure that is permitted by state statute. LLC owners are called members. Most states do not restrict ownership, so members can be individuals, corporations, other LLCs, and foreign corporations. There is no maximum number of members.

A limited liability company (LLC) is a business structure in the United States in which the owners are not personally liable for the debts or liabilities of the company. Limited liability companies are hybrid entities that combine the characteristics of a corporation with those of a partnership or sole proprietorship.

Most states also allow “single-member” LLCs that have only one owner. It is a business structure that can combine the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation.

An LLC is not a corporation under state law; it is a legal form of a company that has limited liability to its owners in many jurisdictions. LLCs are known for the flexibility they offer business owners; Depending on the situation, an LLC may choose to apply corporate tax rules rather than being treated as a partnership, and LLCs may be organized as a not-for-profit in certain circumstances.

Certain US states (e.g., Texas) allow companies that provide professional services that require a state professional license, such as legal or medical services, may not be allowed to form an LLC but may be required to form a similar entity called a professional limited liability company (PLLC).

Each state can have different rules. You should check with your state if you are interested in starting a limited company.

Some types of businesses generally cannot be LLCs, such as Banks and Insurance Companies. See your state requirements and federal tax regulations for more information. Special regulations apply to foreign LLCs.

Examples of LLCs.

Here are some examples of famous LLCs.

  • Blackberry.
  • Pepsi-Cola.
  • Sony.
  • Nike.
  • Hertz Rent-a-Car.
  • eBay.
  • IBM.

There are many well-known LLC companies that started out small and are big names in the industry today.

Limited Liability Company (LLC)

How to start an LLC?

Steps to Form an LLC:

  • Choose a name for your LLC.
  • File Articles of Organization.
  • Choose a registered agent.
  • Decide on member vs. manager management.
  • Create an LLC operating agreement.
  • Comply with other tax and regulatory requirements.
  • File annual reports.
  • Out of state LLC registration.

1. Choose a Name for Your LLC

Most states do not allow two different business entities to have the same name. For example, you cannot use “Joe’s Pizza, LLC” and “Joe’s Pizza, Inc.” even if they are in different cities. Many states also restrict companies from using certain words in their names, such as “bank”.

You can search for existing company names online in many states to see if your suggested LLC name is available. You should always check the availability of names in your state before filing LLC papers

In addition to any national restrictions, it is wise to research to see if other similar companies in your area are using the same or a similar name. Choosing a unique name can help avoid confusion and trademark infringement lawsuits. You can also consider whether a domain name is available that matches your business name.

2. File Articles of Organization

To form your LLC, you must file the articles of organization with your state’s corporate registry, often the Secretary of State. Some states (including Delaware, Mississippi, New Hampshire, New Jersey, and Washington) use the term “certificate of formation ” instead. Two other states (Massachusetts and Pennsylvania) call the document a ” certificate of organization “.  

3. Choose a Registered Agent

LLCs must have a registered agent. This is a person or company who agrees to receive legal documents on behalf of the LLC if it is sued. The registered agent must have a physical address in the state in which the LLC is registered. Most states maintain a list of private service companies (commercial registered agents) who act as process delivery agents for a fee. An LLC member can act as a registered agent for the LLC. 

4. Decide on Member vs. Manager Management

Most small LLCs choose to be managed directly by their members, but LLCs can appoint one or more individuals (outsiders) to manage the LLC – much like a board of directors oversees a company. Managers vote on important issues such as taking out a loan, buying real estate or changing strategic plans.

5. Create an LLC Operating Agreement

An LLC operating agreement is the roadmap that describes how your LLC will be run. These include, among other things, the ownership and voting rights of members, the distribution of profits and losses, the holding of meetings, how the business will be governed, the rights of members in the event of the death or resignation of a member, and the manner in which the company operates is disbanded when it goes out of business.

The operating agreement is usually not filed with the state and may not be required by your state’s laws. However, it is an important way for business owners to define their rights and obligations and to minimize future disagreements.

6. Comply With Tax and Regulatory Requirements

Additional tax and regulatory requirements may apply to your LLC. These include:

  • EIN: If your LLC has more than one member, it must be given its own IRS Employer Identification Number (EIN), even if it has no employees. If you are starting a one-member limited company, you only need to get an EIN if the LLC has employees or you choose to tax it as a corporation rather than a sole proprietorship (disregarded legal entity). You can get an EIN by completing an online EIN application on the IRS website.
  • Business Licenses: Depending on the type of business and location, your LLC may need to obtain other local and state business licenses. Check with the appropriate state agencies to ensure that you are properly registered, licensed, and authorized to do business in your state.
  • Sales and Employer Taxes: In some cases (for example, if you sell goods and collect sales tax or have employees) you will need to register with the relevant state tax authority.

7. File Annual Reports

Many states require LLCs to file an annual report with a filing fee. In some states, these fees can be substantial – up to $ 800 a year in California.

8. Out of State LLC Registration

To do business in a state other than the state in which your LLC was incorporated, you must register your LLC in that state and appoint a registered agent for service. Learn more about registration requirements for overseas LLCs.

Advantages of an LLC

  • Limited Personal Liability. If your business is a sole proprietorship or a partnership, you and your business are legally the same “person”. Your business debts are also your personal debts. An LLC limits this personal liability because an LLC is legally separate from its owners. LLCs are responsible for their own debts and obligations, and while you can lose the money you invested in the company, personal assets like your home and bank account cannot be used to collect business debts. Your personal assets are also protected if an employee, business partner or the company itself is sued for negligence.
  • Management Flexibility. Corporations have a fixed management structure consisting of a board of directors who oversee corporate policy and senior executives who run day-to-day business. Owners, also known as shareholders, must meet each year to elect directors and conduct other corporate business. LLCs don’t need to use this formal structure, and LLC owners have more choices in how they run business and make decisions.
  • Flexible Profit Distributions. LLCs have flexibility in the way they distribute profits to their owners, and they don’t have to distribute them evenly or according to ownership percentages. For example, two people may have the same interests in an LLC, but they can agree that one of them will receive a larger share of the profits because he or she brought in more money or work in the start-up phase of the company.
  • Less Paperwork. Corporations also offer limited liability, but have certain requirements that may not be well-suited for a small, informally run business. For example, corporations typically have to hold annual shareholders’ meetings, prepare annual reports, and pay annual fees to the state. They also typically have significant record-keeping requirements. In contrast, LLCs are not required to hold annual meetings and are typically not required to keep extensive records. In many states, LLCs are not required to file annual reports.
  • No ownership restrictions. S corporations cannot have more than 100 shareholders, and each shareholder must be an individual who is a resident or citizen of the United States. There are no such restrictions on an LLC.
  • Ability to use the cash method of accounting. Unlike a C corporation, which must often use accrual accounting, most limited liability companies can use the cash register method of accounting. This means that the income is not made until it is received.
  • Ability to place membership interests in a living trust. The members of an LLC are free to place their membership interests in a living trust. It is difficult to place shares in an S corporation in a living trust.
  • Ability to deduct losses. Members who actively participate in the business of a GmbH can deduct their operating losses from the member’s regular income to the extent permitted by law. S corporation shareholders can also deduct operating losses, but C corporation shareholders cannot.
  • Tax flexibility. LLCs can assume any tax status of sole proprietorship, partnership, S company, or C company. The Internal Revenue Service automatically classifies LLCs as partnerships or sole proprietorships based on whether they have one owner or more than one owner. This means LLCs can always benefit from “pass-through” taxation, where the LLC pays no LLC or corporation taxes. Instead, the LLC’s income and expenses are included in the owners’ personal tax returns, and the owners pay personal income tax on all profits.

Disadvantages of an LLC

The LLC has some additional administrative requirements compared to a sole proprietorship or a limited partnership. They usually relate to maintaining liability protection for the LLC members.

  • Cost. Compared to a sole proprietorship or partnership, an LLC is slightly more expensive to operate. The start-up costs are only slightly higher than for a corporation, but there are no start-up or annual fees for own companies and open partnerships.
  • Taxes. A limited liability company may have to pay unemployment benefits for himself that he would not have to pay as a sole proprietorship.
  • Banking. Checks made out to a limited liability company cannot be cashed; they must be deposited into a corporate account. Some banks only charge higher fees for businesses that are incorporated.
  • Separate records. The owners of a limited liability company must take care to separate their personal business from the business of the limited liability company. The limited liability company must keep its own records and should have minutes of meetings. Money must be kept separately. Businesses should keep separate records and the structure of a business can facilitate this.
  • Profits that are subject to social security and medicare taxes. In certain circumstances, LLC owners may end up paying more tax than corporation owners. LLC salaries and profits are subject to self-employment tax, which currently totals 15.3%.
  • Owners must immediately recognize profits. A C corporation does not have to immediately distribute its profits to its shareholders as dividends. This means that shareholders in a C corporation are not always taxed on the corporation’s profits. Because an LLC is not subject to double taxation, the LLC’s profits are automatically included in a member’s income.

FAQs.

What Is a Limited Liability Company (LLC)?

A Limited Liability Company (LLC) is a business structure allowed by state statute. Owners of an LLC are called members. Most states do not restrict ownership, so members may include individuals, corporations, other LLCs, and foreign entities. There is no maximum number of members.

What are the LLC examples names?

There are many other famous LLCs, including the following:
1. Blackberry.
2. Pepsi-Cola.
3. Sony.
4. Nike.
5. Hertz Rent-a-Car.
6. eBay.
7. IBM.

What are advantages of LLC?

Advantages of an LLC:
1. Run Your Own Show. Entrepreneurs are self-starters who prefer to chart their own courses.
2. Limit Your Personal Liability.
3. Avoid Double Taxation and Pass-Through Deduction.
4. Less Administrative Hassles and Paperwork.
5. Flexibility in Sharing Profits.
6. Single member LLC: This structure is taxed like a sole proprietorship.
7. Partners in an LLC: Members elect to be treated like a traditional partnership for tax purposes.
8. LLC filing as a Corporation: The members of the organization may also choose to file as if they were corporation.

What are the Disadvantages of LLC?

The two main disadvantages of an LLC are that its members may have to pay self-employment taxes and that an LLC can be unattractive to some investors due to its often complicated operating agreement. Whether or not you’d benefit from forming an LLC depends solely on your business needs.

How to start LLC?

Steps to Form an LLC
1. Choose a name for your LLC.
2. File Articles of Organization.
3. Choose a registered agent.
4. Decide on member vs. manager management.
5. Create an LLC operating agreement.
6. Comply with other tax and regulatory requirements.
7. File annual reports.
8. Out of state LLC registration.