An LLC stands for Limited Liability Company; it is a type of business that combines the tax benefits of a partnership with the limited legal liability of a corporation. We will discuss LLC advantages, disadvantages, and types. Each of the 3 types of LLC with their examples would be outlined.
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What is an LLC and how does it work?
An LLC is a type of business structure that provides its owners with protection from being personally responsible for business-related debts and obligations. It is a hybrid type of legal structure that combines the characteristics of a corporation and a partnership to form a new type of business entity.
An LLC’s legal status as a hybrid type of business organization means that the federal and state rules regarding taxation, asset protection, and liability are different for LLCs than they are for corporations or partnerships.
As one of the most popular types of business, LLCs are formed every day. However, it is good you know the benefits of starting an LLC before you form one in other to avoid the mistakes that many people make when filling out their documents.
3 Types of LLC
- Single member LLC or single person llc
- Multi member LLC
- Manager managed LLC (or member managed llc)
They are classified into two categories: single-member and multi-member. A single-member LLC is exactly what it says, with one owner who gets all the perks of an LLC. A multi-member LLC has more than one owner with different rights for each member, depending on their ownership percentage or authority within the company. If you’re looking to start your own business there are many factors that need to be considered before making a final decision. You must consider whether you want to be fully responsible for everything that happens or if you would rather have limited liability protection against debt if something goes wrong. No matter how much responsibility you are willing to take on, LLCs are a great choice for many businesses.
What are the 3 types of LLC?
The three major types of LLC are single-member (one owner), multi-member (more than one owner), and manager-managed (a designated person manages the company).
Other Types of LLC
- Family LLC
- Anonymous LLC
- Domestic limited liability company
An LLC is not taxed as a separate entity when it files its Federal income tax return. Instead, their members include the profits and losses on their own personal tax returns.
Single Person LLC (or Single Member LLC)
A single person LLC consists of one owner who is allowed to use the trade name of their business. It is considered a disregarded entity by the IRS because it does not have any separate tax treatment from its owner, this means that it will be taxed as if you owned all profits or losses personally.
This type of LLC business structure provides limited liability protection while still being able to be used in a personal name. This allows you to obtain benefits such as an easier time obtaining bank loans, credit cards, and real estate mortgages. The only drawback is that unless your state has designated another name for this type of business you can’t use initials after your name as a professional courtesy.
Single-member LLCs have more flexible profit distributions than traditional corporations. The owner can elect to take part or none of the profits as salary or dividends, though this may affect tax write-offs. They also have limited liability compared with S-Corps and C-Corps because most debts of the business will only be applied to the individual member’s personal possessions, not those that belong to their LLC. Finally, if members want to dissolve an LLC they must agree unanimously whereas in a traditional corporation the majority vote rules.
A multi-member LLC is owned by more than one person who shares responsibility and liability for its actions. This type of company is treated as a partnership by the IRS and is taxed accordingly. This structure does not offer limited liability protection like that of its single-member counterpart. If you are looking for personal asset protection against business debt, then this type of LLC is not right for you. However, it provides one major advantage over other types of businesses; there are no restrictions on how profits are distributed among its members which means no double taxation like with S-Corps or C-Corps.
Multi-member LLCs allow more than one person to be involved in the running and ownership of a company without them being fully responsible for everything that happens. If you have a close friend or family member who wants to start a business with you but won’t take on any personal liability, you can set up an LLC with them as a member. Another benefit is that the company’s profits are not taxed on their personal returns at first, but instead accumulate in the company account until it is distributed to the members according to the terms of their agreement.
Family LLC is a type of limited liability company formed by family members. In most cases, members of a Family LLC are family members, not just a single member.
In order to start a Family LLC, the minimum number of members is two. The members can be individuals, corporations, trusts, or other limited liability companies. Many US states allow Family LLCs to choose whether they want to be taxed as a partnership, tax-exempt, or corporation.
There are some disadvantages to choosing an LLC structure. For example, it is easy for a creditor to add new members to a Family LLC, which can result in personal liability for debts of the business. In addition, income from the Family LLC is distributed to the members based on their percentage of ownership. This means that each member will be allocated a portion of the profits and losses.
Anonymous LLC is a limited liability company in which the owners are not disclosed. A common anonymous business structure, it is primarily used in jurisdictions or states that do not require the disclosure of the owners’ identities.
Owners may wish to remain anonymous so as not to be accessible by their commercial partners, creditors, or even the general public. It is also chosen for privacy reasons, to prevent people from learning the owner’s personal information. Some states in the United States make it easy to set up anonymous LLCs with little or no fee.
The anonymous LLC, in some ways, is the opposite of the public company in which profit motives predominate. Anonymous limited liability companies are the most suitable for organizations seeking to minimize risk. These are usually family LLCs, owned or operated, with discretion given to a responsible individual concerning profit distribution.
Domestic limited liability company
A domestic limited liability company is a business entity that is incorporated in a particular state. It is a separate legal entity from its owners. As an owner, you are not personally liable for any debts or liabilities of the business. However, you may lose the entire value of your investment in such a company if it is forced into bankruptcy.
A domestic LLC has less stringent requirements for an initial filing than most other types of corporations, which can be established by organizing your LLC with the help of an attorney. After your domestic LLC is established, you must file annual reports with the state in which it was incorporated.
LLC advantages and disadvantage
Limited liability companies have benefits as well as some drawbacks. The table below summarizes the advantages of LLC as well as their disadvantages. Details of benefits and demerits would be discussed in the following sections.
LLCs have more flexible profit distribution than traditional corporations. Members are allowed to choose whether or not they wish to take a salary, though this may affect tax write offs.They also havemore limited liability compared with S-Corps and C-Corps because most debts of the business will only be applied to the individual member’s personal possessions, not those that belong to the LLC.
Although it is possible for an LLC owner to lose their house in case of bankruptcy it would be protected by said owner’s other personal belongings. Finally, if members want to dissolve an LLC, all parties must agree unanimously whereas in a traditional corporation the majority vote rules.
A table showing LLC advantages and disadvantages
Asset protection strategy
It provides personal liability protection to members.
Only provides protection from certain types of liability, but not all liabilities.
Members can avoid double taxation of a corporation and still have the benefit of liability protection.
Some members that work for the LLC are often considered self-employed and such members are charged for Social Security and Medicare tax; most times at a higher rate than the corporate taxation rate.
There is no limit on how many people can contribute to an LLC nor are there any branching restrictions if another company wishes to start up an LLC.
Transfer of ownership can be difficult, especially in multi-member LLCs where other members must agree on any ownership changes.
Some LLC advantages include the protection of its owners from being responsible for paying all debts and liabilities incurred by the business because it provides limited liability protection as corporations do. Another advantage is that LLCs avoid double taxation – instead of paying tax twice or more on your business income, LLCs only pay taxes once like a sole proprietorship or partnership which frees up more of your profit.
Finally, there is no time requirement for when to dissolve an LLC unlike corporations; you can dissolve it at any time if you and your co-owners agree to do so.
Because an LLC does not offer the same liability protection as a corporation it may be difficult to find investors, banks, and other institutions that will take on financial responsibility without wanting to own equity in the business. If you are trying to obtain loans from institutions, they will require that you show personal guarantees such as having your home or car pledged against the debt repayments just like with S-Corps and C-Corps.
Another disadvantage of LLC stems from its tax treatment, which is similar to partnerships. An LLC does not have the same tax treatment for its members as a corporation and there can be double taxation if you take your profits as salary instead of distributions (such as working as an employee and at the same time you are one of the owners of the LLC).
Tax rates for an S-Corp and C-Corp are lower than those of single-member LLCs or multi-member LLCs taxed as partnerships which could adversely affect your business’s bottom line.
Examples of LLCs include Microsoft Corporation, Twitter Inc., J Crew Group Inc., Martha Stewart Living Omnimedia Inc.
Professional limited liability company
Some professionals such as doctors, engineers, architects, or financial managers often form LLCs in order to protect individual members from personal liabilities that may arise in the course of practicing their profession.
What is a professional LLC?
A professional LLC is a legal structure that allows professionals such as doctors to combine business with personal assets in a single entity, similar to a corporation.
The most common examples of professional LLCs are those formed by doctors, attorneys, and other professionals who incorporate their practices. The formation and management of a professional LLC are similar to that of a regular LLC: a manager or management team is chosen, operating agreements are written.
Professional LLCs are taxed differently than other LLCs. Like partnerships, all the income or losses are contained within the entity and are divided according to the operating agreement. It is important to note, however, that if a professional LLC is owned by a single person or partner, then that LLC won’t be taxed as an entity. Instead, the income will pass through to the owner’s personal returns.
Professional LLCs are required to file Form 8832 with the IRS in order to have their tax status changed from a traditional LLC to a Professional LLC with the IRS.
Multiple businesses under one LLC
Multiple businesses can be formed under one LLC. This is possible when the LLC uses a Fictitious Name Statement or a “DBA” (Doing Business As) in order to operate multiple businesses under one LLC.
This means that it is legal for a person to own several LLCs, but that each business will be separately taxed. A single tax return must be submitted for all of the LLCs owned by the individual; however, each LLC will be responsible for its own taxes.
Requirements for starting an LLC
The owners must meet specific requirements to be eligible for an LLC:
- They must be U.S citizens or permanent residents
- They cannot be businesses themselves and they can have no other part in any other LLCs throughout the country.
- Among their most advantageous features, there is no limit on how many people can contribute to an LLC nor are there any branching restrictions if another company wishes to start up an LLC. However, there are rules on how many LLCs can be formed under the same name.
Mistakes to avoid when starting an LLC
- Selecting the wrong type of business entity for your LLC.
- Not understanding how state taxes work and not using a tax professional.
- Not filing/failing to maintain LLC records.
- Falsifying or improperly completing the required documentation.
- Making errors when operating your LLC.
- Not having a written operating agreement.
- Incorrectly filing articles of organization.
- Incorrectly completing the tax election form.
- Not keeping LLC records up to date.
- Not maintaining a separate bank account for your business, or commingling personal and business expenses/income without proof of reimbursement from the company owner(s)/member(s) as necessary.
- Not paying your LLC taxes or filing on time.
It is important to recognize and correct any of these mistakes when setting up a new LLC.
What does LLC mean?
LLC means Limited Liability Company; it is a form of business that provides personal protection to its owners (who are called members).
Is an LLC a corporation?
An LLC is not a corporation; A limited liability company is its own legal entity and its owners are called members while the owners of a corporation are called shareholders, but an LLC can file as a corporation when it has more than one member and elects to be treated as a corporation by filing Form 8832 with the IRS.