What is an LLC?
Choosing a formal business structure for your company can sometimes be mystifying. However, a limited liability company (LLC) is a popular choice among small business owners due to its liability protection, tax advantages, and management flexibility. Familiarity with an LLC’s benefits and disadvantages, how to form an LLC, and other key issues is essential for business success.
An LLC is a legal business structure that provides limited liability protection and pass-through taxation. As with all types of corporations, the LLC is a separate legal entity from its owners. As such, LLC business owners are not usually held personally responsible for any business debts or liabilities
Advantages of an LLC
Increased Credibility
Forming an LLC might help a new business establish credibility more so than simply operating as a sole proprietorship or partnership.
Limited Liability
Members are protected from personal liability for acts of the LLC and its other members. For example, creditors cannot go after the LLC owner’s personal assets to pay business debts. On the other hand, the personal assets of sole proprietors and general partners can be used against the business’s debts. Although, it is important to note that an LLC can lose its limited liability.
Passthrough Taxation
With pass-through taxation, an LLC will not be taxed at the entity level. Even still, the LLC must file a tax return if it has more than one owner. Any LLC income or loss on this return is passed down to the owner. The owners, also known as members, are then responsible for reporting the income or loss on their personal tax returns and paying any necessary taxes.
Limited Compliance Requirements
LLCs do not have as many state-imposed compliance requirements and ongoing formalities compared to sole proprietorships, general partnerships, or corporations (either taxed as an S-corporation or a C- corporation).
Disadvantages of an LLC
As with all business formations, there are a handful of disadvantages to an LLC too. However, in many cases, the benefits outweigh the drawbacks.
Cost
Typically, an LLC costs more to form and maintain than a sole proprietorship or general partnership. LLC owners must pay an initial formation fee to the state where the LLC is formed. Many states also require ongoing fees, including annual reports and franchise tax fees. You can contact your secretary of state’s office for more information about applicable fees in your state.
Harder to Transfer Ownership
Transferring ownership in an LLC can be more complicated than in a corporation. Corporations can sell shares of stock to increase ownership, and, barring a shareholder agreement to the contrary, the shareholders can sell their shares to someone else. With most LLC formations, unless the members make an alternate agreement, all members must approve adding new members or altering the ownership percentages of existing members.
Requirements for an LLC
The requirements for forming an LLC can vary from one state to the next. However, generally, LLCs must have a registered agent. The registered agent agrees to accept legal papers on behalf of the LLC if someone files a lawsuit against it. The registered agent is required to have a physical street address located within the same state where the LLC is registered. Many states keep a list of private service companies willing to act as agents for service of process for a fee. However, an LLC member is allowed to serve as the registered agent.
While each “owner” of the LLC is a “member” the LLC must select one or more “managing members” to manage the day-to-day affairs and operations of the LLC. Oftentimes, the “managing member(s)” have ultimate or majority decision making powers and authority.
If the LLC has multiple members, it must get its own IRS Employer Identification Number (EIN), whether it employs others or not. A one-member LLC only has to get an EIN if the LLC has employees or the member desires to have it taxed as a corporation rather than a sole proprietorship (disregarded entity).
How to Form Your LLC
- Decide in which state to form your LLC.
- Choose an LLC name.
- Choose a Managing Member(s)
- Select a registered agent.
- Draft an LLC operating agreement.
- File LLC formation documents with the secretary of state’s office in the state where you are forming the LLC.
Which Legal Structure is Best for My Business?
LLCs can have many benefits over other legal business formation options. Before deciding if an LLC is the right choice for your business, you will want to ensure you completely understand its benefits and drawbacks. It is possible that the following types of formations might better meet your business goals:
- S-Corps
- C-Corps
- Partnerships
- Sole Proprietorships
You should consider several points when determining the proper structure for your business endeavors. Meeting with an experienced business lawyer before making such a monumental decision can help you start your business on the right foot. At Steinberg Law, we will listen closely to your plans and goals and ensure you understand your options. We are here to help you make the best decisions for your business. Contact us today.
