Most companies are designed as limited, or LLCs because of the flexibility and protection needed to make the corporate structure appealing to business owners.
What Are Limited Liability Company (LLC)?
Limited liability company (LLC) is a business structure designed to offer several benefits to its members. It is a business structure in the United States whereby the owners are personally responsible for the company’s debts or liabilities. They are governed by the individual states and are recognized in all states and are organized by filling with the appropriate state government office, even though state laws as regards LLCs vary.
In all states, an LLC is a combination of a partnership as well as a corporation, even though it is technically neither. An LLC enables the pass-through taxation of a partnership with the limited liability of a corporation.
Advantages of Limited Liability Company (LLC)
Limited liability companies come with flexibility and protection, which makes the corporate structure appealing to business owners. Instead of shareholders, business owners of limited liability companies are known as members.
A limited liability company can select between different tax treatments. They can decide to adopt the tax regime of sole proprietorships, partnerships, S corporation, or C corporations. It offers the company the option of being treated as a flow-through entity, as long as it does not opt not to be treated as a C corporation.
The income comes off as a flow-through entity and is treated as the income of its owners. What this, implies is that owners of an LLC are able to avoid double taxation, (i.e.) If its double taxation, income gets taxed both at a corporate level and also when distributed as dividends to owners. Rather income is taxed at an individual member level instead of at a company level.
If the company decides that it wants to be taxed as a partnership, it’s income can be allocated across members in the form other than ownership percentage. Members agree upon this in the operating agreement.
The operating agreement of the company acts much like the bylaws of a corporation. The document governs the company’s finances, organization, structure, and operations.
Limited liability companies also benefit from the advantages of corporations. The largest and most prominent of the benefit is the company’s limited liability status. The company stands as its own legal entity. These safeguards members and owners from being held personally responsible for the operations and debts of the business.
Disadvantages of a Limited Liability Company (LLC)
The main disadvantages of limited liability companies are the fees and taxes linked with the business structure. Howbeit, such companies are governed differently by the state, which makes regulations to also become a disadvantage.
Fees and Taxes
Owners of a limited liability company benefit by avoiding double-taxation, they are also needed to pay self-employment taxes. These taxes are paid twice as the owner is both the employee and the employer.
Some states also demand an annual fee for the limited liability benefits that LLCs offer their members. This fee is sometimes called a franchise tax.
An LLC is governed by state law, and this can drastically change how the company fares in different scenarios. In most instances when a member of the limited liability company dies, some states may dissolve the company, while in other states the company will continue to exist and the deceased member’s membership shares are passed to the executor.
How to Form an LLC
Even though the requirements for LLCs may differ by state, there are generally some commonalities across the board.
Now the very thing owners or members must do is to choose a name. After choosing a name, the articles of the organization must be documented and filed with the state. These articles establish the rights, powers, duties, liabilities, as well as other obligations of each member of the LLC.
Other information contained on the documents includes the name and addresses of the LLC’s members, the name of the LLC’s registered agent, and the business’ statement of purpose.
The articles of organization must be accompanied by a fee paid straight to the state and paperwork and additional fees must also be submitted at the federal level in order to obtain an employer identification number (EIN).