What is a Limited Liability Company (LLC);-A limited liability company is a well-known business structure, where the owners are not personally liable for the company’s debt or liabilities. Limited liability companies also gain from the flexibility and flow-through taxation of partnerships and sole proprietorships even as it maintains the limited liability status of corporations.
How Limited Liability Company Works
It is a newer business structure, that provides both a partnership and a corporation. LLCs, are regulated by the individual states and are also recognized in all states. They are structured by filing with the constituted state government office, even though state laws as regards limited liability company varies. For all states, an LLC is a combination of a partnership and 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.
Many states, do not restrict ownership, which implies that anyone can be a member including individuals, corporations, foreigners, as well as foreign entities and even other LLCs. Note also that some entities cannot form LLCs, including banks and insurance companies.
With an LLC, you have a more formal partnership arrangement that requires articles of organization that are to be filed with the state. Also, an LLC is much easier to set up, more than a corporation, and offers more flexibility as well as protection.
LLCs may elect not to pay federal taxes, but instead lists profits and losses on the personal tax returns of the owner(s). Alternatively, they may decide on a different classification, like a corporation. In the event where fraud is detected or if a company has not met legal and reporting requirements, creditors may be able to go after the members.
Advantages & Disadvantages of Limited Liability Company
One bright side of a limited liability company is its ability to limit the principals’ liability. Most people, see an LLC as a combination of a partnership, which is a simple business formation of two or more owners who are under an agreement, and a corporation, that has some liability protection.
Even though LLC has its perks, still it is not without some disadvantages. This is mainly so when it concerns the structure of a corporation. Because of some state laws, an LLC may have to be dissolved in the event of death or bankruptcy of a member. An LLC may not also be a suitable option if the founder’s aim is to become a publicly-traded company.
Although owners of a limited liability company benefit, by avoiding double-taxation, they are also expected to pay self-employment taxes. Now, these taxes are paid twice as the owner is both the employee as well as the employer.
In some states, an annual fee is also demanded by limited liability benefits that LLCs offer their members. This fee is most times known as a franchise tax.
How to Form a Limited Liability Company
There are still some general commonalities across the board when it comes to forming an LLC, even though the requirements vary by state.
Informing an LLC:
- Members must first choose a name.
- Thereafter the articles of the organization must be documented and filed with the state. These articles are what establish the rights, powers, duties, liabilities, and other obligations that each member of the LLC has. Other information obtained in 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 the organization must come with a fee, which is being paid directly to the state. Paperwork as well as additional fees must also be submitted at the federal level in order to obtain an employer identification number (EIN).