What is an LLC and why do I need one?
An LLC (limited liability company) is one of the most popular entity types chosen by new business owners and start-ups. It's of the easiest entity types to set up and maintain with few annual requirements or ongoing filings.
One of the reasons that forming an LLC has become so popular among small business owners is because it limits your personal liability for the debts of the business, while still being very easy to operate and maintain.
What is Liability Protection?
Liability Protection is the separation of your personal assets from the assets of your business. This separation prevents you from being financially responsible for debts and liabilities of your business. Even though members are still liable, that liability is limited to the extent of their investments in the business. If, for instance, your company is involved in a lawsuit, the assets of the LLC itself could be in jeopardy, while the personal assets of the members/owners would be protected.
What kinds of businesses typically choose to file as a limited liability company?
Limited liability companies are easy to maintain while remaining extremely flexible, so it's not surprising that it is a popular choice among businesses of all different shapes and sizes. Often, owners of an LLC are self employed or run smaller businesses, where the simplicity of pass through taxation and a lack of annual requirements makes a lot of sense.
Since the profits and losses are reported directly on the owners personal tax returns, filing taxes is much easier.
For businesses in industries like construction or real estate, where unforeseen circumstances and hazardous conditions may hold the owner responsible, consider creating an LLC online. The protection gained means you will not be held personally liable, protecting you and your family from litigation or the debts of the business.
An LLC may not be the best choice for business owners who plan on raising capital through outside investment. LLCs are not public structures and do not have shareholders, so taking a company public is not an option either. However, in the event that you'd like to take your business public you may switch to a public legal structure, like a C corporation, later on.
To learn more about the differences between an llc and a corporation, take a look at our detailed llc vs corporation comparison.
What are the maintenance requirements of an LLC?
LLCs have fewer ongoing requirements compared to their corporation counterparts. For example, an LLC is not required to keep minutes or hold annual meetings. An LLC also does not have a board of directors, and isn't held to the same record keeping standards of a corporation. Keep in mind that the state of incorporation in will have its own set of annual requirements. That includes filing the required business licenses and permits, which vary from state to state.
Be sure to check in with your Secretary of State to ensure you don't accidentally miss any required filings.
Are there tax advantages for LLCs?
Depending on how your business is structured, the amount of revenue your business earns, and several other factors, forming an LLC can provide potential tax benefits for business owners. LLCs are allowed to choose how they want to be taxed, either as an S corporation or C corporation. These options are not available when you are operating as a sole proprietorship.
LLCs don't pay their own taxes directly, the income of the business its passed on to the members of the LLC through "pass through taxation." This means that a member is subject to self-employment taxes, but at higher levels of income, the LLC can often pay a lower base tax rate than a C Corporation. The best way to determine your potential tax benefits is to consult an accountant.
Does an LLC have flexible ownership?
Even though many LLCs only have a single member (owner), the LLC structure itself allows for an unlimited amount of owners. This also gives the power to you, the owner of the business to determine its structure.
What is a Series LLC?
A series LLC is a form of limited liability company that provides liability protection to multiple "series". Essentially, it's a master LLC with separate divisions, each protected and operating independently. As an entity, the series LLC is geared towards businesses where investors own multiple companies, with each series being protected from the debts and obligations of the other series. Currently, only several states support this option, including Delaware, Illinois, Iowa, Nevada, Oklahoma, Puerto Rico, Tennessee, Texas, and Utah.
