Limited Liability Companies

One of US startups’ most popular business entities is the limited liability company (LLC). This legal structure can combine the benefits of pass-through taxation with a limited liability like a partnership or sole proprietorship. It offers a high degree of flexibility and is less costly to form than corporations.

Many states offer the option to form an LLC. The process varies by state, but you typically need to file Articles of Organization with the secretary of state or another department that handles business filings in your state. Once the articles are filed, you will receive a certificate that confirms your business’s formation and can be used for bank accounts, EINs, and other legal documents.

Forms of LLCs

An LLC can be formed in different ways. These include single-member, multimember, member-managed, manager-managed, PLLCs, series, and restricted. The exact management structure of an LLC must be established in the operating agreement.

1. Single-member LLC: This is an LLC with only one owner. It is the simplest form of LLC, and the income and expenses of the LLC are reported on the owner’s personal tax return.
2. Multimember LLC: This is an LLC with two or more owners. The income and expenses of the LLC are reported on the owners’ personal tax returns. This type of LLC can be either member-managed or manager-managed (explained below).
3. Member-managed LLC: All members have an equal say in the company’s management in this type of LLC. Members make decisions through a vote, and each member has one vote.
4. Manager-managed LLC: In this type of LLC, one or more managers are appointed to manage the company. The managers may or may not be members of the LLC. If the managers are not members, they are considered employees of the LLC.
5. Professional LLC (PLLC): This is a specialized type of LLC formed for licensed professionals, such as doctors, lawyers, and accountants. Licensed professionals can only form LLCs in many states if they form a PLLC.
6. Series LLC: This is a relatively new type of LLC recognized in some states. It allows a single LLC to have multiple “series” within it, each with its assets and liabilities. This can benefit businesses with multiple lines of business or investments.

What is the Purpose of Having an LLC?

The LLC combines a partnership’s flexibility with a corporation’s asset protection. It also provides a range of tax benefits to its owners. An LLC’s main advantage is that it limits the personal liability of its members and owners for the debts and legal liabilities of the business. This means that if the business faces a lawsuit or the creditor seeks repayment, only business assets are at risk of being claimed to satisfy debts.

As a result, an LLC’s owners can keep their homes, cars, investments, and bank accounts separate from their businesses — which may be helpful in a financial emergency. They can also raise additional capital from investors without risking their personal assets. In addition, the LLC allows for income splitting among its members. This allows a member to take a larger share of the profits if they invest more money upfront or put in more sweat equity.

Another great benefit of an LLC is that its members can organize the business as they wish. Unlike corporations, which must have a set of officers and a board of directors, an LLC’s members can choose to manage the company on their own or hire outside managers. An LLC is a pass-through entity for federal tax purposes, meaning that its profits are reported on the individual tax returns of its members and are not taxed at the corporate level. This can save the company money by lowering its tax burdens and allowing it to avoid paying taxes on corporate income.

What are the Disadvantages of an LLC?

If you are a small business owner, you may want to consider forming a limited liability company (LLC). However, there are a few disadvantages that you should consider before forming an LLC. One of the biggest disadvantages of having an LLC is that you might have to pay more taxes than you would with a different business structure. This is because an LLC will be taxed twice on profits as a sole proprietorship or partnership would be. This is a major disadvantage for many businesses.

Another downside is that an LLC cannot save or reinvest profits. It must either divide them among its owners or distribute them as dividends. This can be a disadvantage for those needing to retain significant amounts of money to grow their business. Finally, an LLC cannot issue stock in the same way that a corporation can. This can make it difficult for investors to purchase shares of the business, and it can also be difficult to transfer ownership.

Moreover, an LLC is not treated as a corporation when it comes to lawsuits, so you may have less control over where the case is held. This can be a big disadvantage in some situations, especially if you have an out-of-state business or are sued by a customer in a foreign country. Despite these disadvantages, LLCs are still popular business structures for their flexibility and personal liability protection. But if you are unsure whether an LLC is the right business structure for you, it’s best to consult with a lawyer before making any decisions. The best lawyers can be found on UpCounsel, where you can post your legal need and get quotes from top-rated attorneys.