What is an LLC?
A Limited Liability Company (LLC) is one of the most popular corporate forms among new entrepreneurs.
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It’s very easy to establish and maintain with few annual requirements and obligations.
One of the reasons the LLC is such a popular choice among small businesses is because it protects its owners from being held personally liable for corporate debts, while being very easy to manage and maintain.
What is liability protection?
Setting up a limited liability company separates your personal assets from those of your business.
This protects you from being financially responsible for corporate debts and liabilities.
While members are still responsible, that liability is limited to the size of their investment in the business.
For instance, if your company is involved in a lawsuit, the assets of the LLC could be in danger, while the personal assets of the members / owners would be protected.
What types of companies usually opt for an LLC?
Limited Liability Companies are easy to maintain while remaining extremely flexible, so it’s no surprise that they’re a popular choice among companies of all shapes and sizes.
Often, LLC owners are self-employed or run smaller businesses, where the simplicity of taxes and the lack of annual requirements makes a lot of sense.
Since the gains and losses are reported directly on the owners’ personal tax returns, filing taxes is much easier to do.
For businesses in industries such as construction or real estate, where unforeseen circumstances and dangerous conditions can hold the owner accountable, consider starting your business with an LLC.
The protection gained means that you won’t be personally liable, protecting you and your family from litigation or corporate debt.
However, an LLC may not be the best option for entrepreneurs looking to raise capital through outside investments.
LLCs aren’t public structures and have no shareholders, so it’s not an option if you want to raise capital by opening as a public company.
However, if you plan to have a public company in the future, you can always switch from an LLC to a corporation at a later date.
What are the maintenance requirements of an LLC?
LLCs have fewer requirements than their business counterparts.
For example, an LLC must not hold annual meetings or record such meetings. An LLC doesn’t have a board of directors and isn’t subject to the same administrative standards as a corporation.
*Note that the state of incorporation will have its own set of annual requirements*
This includes submitting required business licenses and permits, which vary from state to state. It is advisable to check with your Secretary of State so as not to miss the delivery of any required documentation.
Are there tax advantages for LLCs?
Depending on how your business is structured, the amount of income it earns, and various other factors, establishing an LLC can provide potential tax benefits for owners.
LLCs can choose how they are taxed, although these options aren’t available when operating as a sole owner.
LLCs don’t pay their own taxes directly, income is transferred to members of the LLC via the “tax pass”.
This means that a member is subject to self-employment tax, but at higher income levels.
LLC can often pay a lower base tax rate than a corporation.
The best way to determine potential tax benefits is by consulting an expert.
Does an LLC have flexible ownership?
Although many LLCs have only one member (owner), the LLC structure allows for an unlimited number of owners.
This also allows you, the owner of the company, to determine its shape.