WHAT IS A LIMITED LIABILITY COMPANY (LLC)?
A limited liability company (LLC) is a business structure that protects its owners from personal responsibility for its debts or liabilities. Limited liability companies are hybrid entities that combine the characteristics of a corporation with those of a partnership or sole proprietorship.
While the limited liability feature is similar to that of a corporation, the availability of flow-through taxation to the members of an LLC is a feature of a partnership rather than an LLC.
- The limited liability company is a corporate structure that protects its owners from being personally pursued for repayment of the company's debts or liabilities.
- Any entity or individual can be a member of an LLC with the notable exceptions of banks and insurance companies.
- LLCs do not pay taxes on their profits directly. Their profits and losses are passed through to members, who report them on their individual tax returns.
Understanding a Limited Liability Company (LLC)
Limited liability companies are permitted under state statutes, and the regulations governing them vary from state to state. LLC owners are generally called members. An LLC is a formal partnership arrangement that requires Articles of Organization to be filed with the state. An LLC is easier to set up than a corporation and provides more flexibility and protection for its investors. LLCs may elect not to pay federal taxes directly. Instead, their profits and losses are reported on the personal tax returns of the owners. The wages paid to members are deemed operating expenses and are deducted from the company's profits.
Forming an LLC
After choosing a name, the first step is filing the Articles of Organization. These articles establish the rights, powers, duties, liabilities, and other obligations of each member of the LLC. Other information included on the documents includes the names 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 are filed, along with a fee paid directly to the state. Paperwork and additional fees must also be submitted at the federal level to obtain an employer identification number (EIN). Thereafter a business Operating Agreement is prepared (Much like Corporate Bylaws), and a Statement of Information is filed.
Advantages and Disadvantages of LLCs
The primary reason business owners opt to register their businesses as LLCs is to limit the personal liability of themselves and their partners or investors. Many view an LLC as a blend of a partnership, which is a straightforward business agreement between two or more owners, and a corporation, which has certain liability protections. Although LLCs have some attractive features, they also have several disadvantages. Depending on state law, an LLC may have to be dissolved upon the death or bankruptcy of a member, whereas a corporation can exist in perpetuity. An LLC may also not be a suitable option if the founder's ultimate objective is to launch a publicly traded company.
Limited Liability Company vs. Partnership
The primary difference between a partnership and an LLC is that an LLC separates the business assets of the company from the personal assets of the owners, insulating the owners from the LLC's debts and liabilities. Both LLCs and partnerships are allowed to pass through their profits, along with the responsibility for paying the taxes on them, to their owners. Their losses can be used to offset other income but only up to the amount invested.
If you would like to set up your LLC, contact Duvel Law, APC., today to begin that process. Most LLCs can be established in less than 10 days.