A Limited Liability Company, or an LLC, is the simplest business structure in the United States. Forming an LLC is easy, and brings lots of benefits. When you compare an LLC to an S Corporation or a C Corporation you will find that LLC’s structure is quite flexible. As it names suggests, LLC gives you protection from personal liability. This means, you personal assets are protected in the case that your business goes into legal hardship and ends up in a courtroom.
When you decide to form an LLC, your business will become its own legal entity. The company will be responsible for lawsuits and debts, not the owners. While forming an LLC you can pick between being a “single member LLC” or “multi-member LLC”, meaning you have either one owner or multiple owners, respectively.
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Advantages of an LLC
There are many advantages of forming an LLC, for example:
Pass-through taxes
The profits of an LLC goes directly to its members. These profits are then reported on their own individual tax returns. With this all of the profits gets taxed once. There is no need to file a corporate tax return. However, if in your case it is more beneficial to be taxed as a corporation, then LLCs gives you that flexibility as well. Contrary to a C Corporation where profits are subject to “double taxation”, first they are taxed at the corporation level, and then taxed again when the owner report them in their personal tax return.
Asset Protection
One of the biggest benefits of an LLC is that your assets are always protected as long as there is no criminal activity, including fraud. The members of a LLC are not responsible for debts and obligations, including lawsuits.
LLC Residency Requirement
Members of an LLC are not required to be United States citizens or permanent residents.
Simple and Flexible
LLCs are very easy to form. Paperwork is minimal as well. In comparison to C-Corporations and S-Corporations where they need to assign formal roles, hold annual meetings, and record company minutes. An LLC can be structured in several ways, it can be single or multi member. LLCs can be managed directly by their members or by managers who members appoint. When electing to have a multi-member structure, make sure you draft an operating agreement. An operating agreement will protect all the members from legal disputes.
Credibility
Forming your own LLC gives you credibility as a serious business owner.
Business Loans
Once you start an LLC you can create bank accounts and build up credit under the LLC and have access to get loans to start or fund your business.
Disadvantages of an LLC:
As with everything, there are some disadvantages to an LLC.
- You cannot become a public company and get listed in the stock market. This will prevent you from issuing shares or obtain funding via Venture Capital investors.
- Depending on where you form your LLC it can be treated differently. Regulations change from state to state.
- Profits from an LLC can be subject to self-employment tax.
Types of LLC
There three types of LLCs you should be aware of:
Domestic LLC
Most likely everytime someone mentions LLC they mean “Domestic LLC”, this means that the LLC is doing business in the state it was formed under. Most LLCs are formed in the state where the members are located, for example, if you are forming an LLC in Florida, why would you form an LLC in New York? It doesn’t make much sense in the beginning, however as your business grows you might want to expand into other states in which you might open an office or hire employees, in that case, then you need to form a “foreign LLC” in the other state.
Foreign LLC
When a already formed LLC decides to expand into another state and conduct business, then you need to register your LLC as a “foreign LLC” in the new state. From our example above, you’d to setup your LLC as a foreign LLC in New York. Remember you can always check how to form an LLC in your state here.
Professional LLC
If you are doing a professional service such as a legal practice, or medical services then you’d need to form your LLC as a “Professional LLC”. In this case some members of the organization needs to have special license to proof their professional qualification. Always talk to an attorney when opening a professional LLC, there are some special regulations that you need to be aware of, for example professional LLC cannot pass the limitation of personal liability in case of professional malpractice claims.
How to Form an LLC (Limited Liability Company):
After you pick your state:
- Complete the ‘Articles of Organization’ forms.
- Choose a registered agent
- Mail the form along with the mandatory State Filing Fee to your state’s Secretary of State Office.
- Get an EIN by filling out the form and mailing it to the IRS.