What is an LLC?
You’ve got the great idea, and got the funding, but there’s still another important task before you get that business off the ground. The step of incorporating is needed before a company can begin doing business and will set the legal framework for how this company will pay taxes, have legal protection and how its owners will receive income.
There are many choices on how to classify the business—from corporation to sole proprietorship to partnerships—each with its own benefits and regulations. For those who seek to limit their liability, have a flexible management structure and the benefits of pass-through taxation, a limited liability company might be the best bet. The ease of formation and cheaper cost made LLCs especially popular through the recession of the late 2000s, with new formations up 12 percent during this period.
Starting an LLC is popular because any type or combination of people or organizations can form one. The owners are referred to as members, and with loose restrictions in many states these members can be individuals, corporations, foreign entities or even other LLCs. Generally, the only restrictions on forming limited liability companies are placed on organizations like insurance companies or banks.
Just like with corporations, the owners of an LLC have limited personal liability for the organization’s actions and financial obligations. They also have multiple options for how the LLC will be taxed based on its structure, so it can resemble a corporation, sole proprietorship or partnership. Limited liability companies also can claim what the IRS refers to as pass-through taxation, which is generally used for partnerships.
When it comes to taxation, the federal government does not actually recognize limited liability company as a specific tax classification. This means that the LLC is not itself taxed, but instead its members are taxed on their individual share of profits. If the LLC has a loss instead of a profit, the members can deduct their share of the loss on income tax returns.
Members of an LLC have greater control over the profit sharing process. While a partnership requires that profit be split equally, a limited liability company’s members can choose their own distribution. Limited liability companies also have a looser structure than corporations. While corporations are required to hold official meetings that keep minutes and record resolutions, but there is no such requirement of LLCs.
There are also limitations to limited liability companies. While corporations are able to last indefinitely, and LLC is dissolved when its members die or have to file for bankruptcy. Members of LLCs are also unable to make their business public, and must switch to a corporation first before they can do this.
Because the limited liability company is a relatively new classification compared to partnership or corporation, there is little legal precedence on some of the hazier legal issues surrounding its operation. Business experts warn that some of the ideas or regulations are based on assumptions and not actual legal decisions made in a courtroom, so they could be subject to being overturned. Because of this uncertainty these experts suggest that the business have a knowledgeable lawyer or accountant who can keep up with LLC laws and any changes that may occur.
There are some specific types of limited liability companies that can also be created. A PLLC, or professional limited liability company, is one formed for the purpose of providing professional services like medical treatment or legal services. These are popular among law firms, doctors, chiropractors and architects. All the members of a PLLC must practice the same profession. Some states, like California, do not permit this kind of LLC.
Another specific type of limited liability company is used as a way to split up one LLC into smaller entities. Known as a Series LLC, this is a common structure when there are multiple business holdings and members want to keep them protected. A real estate company could create different LLCs for each property it owns, meaning if one faces foreclosure it would not affect assets of any of the other properties.
All states have different oversight and requirements of limited liability companies, so business owners interested in forming LLCs must do some research to make sure they are complying with their local laws. Because of the tax benefits and liability protections they provide, LLCs are now one of the most popular types of businesses being formed, surpassing even corporations.
For more information or forms on how to form a limited liability company, turn to our site.