What is a limited liability company (LLC)?
A limited liability company (LLC) is a corporate structure in the United States by which the owners are not personally liable for the debts or liabilities of the company. Limited liability companies are hybrid entities that combine the characteristics of a company with those of a partnership or a sole proprietorship.
Although the characteristic of limited liability is similar to that of a corporation, the availability of flow-through taxation for the members of an LLC is a characteristic of partnerships.
Understanding limited liability companies (LLC)
Limited liability companies (SARL) are a commercial structure authorized by state laws. Regulations regarding LLCs vary from state to state. The owners of LLC are usually called members.
Many states do not restrict ownership, which means that anyone can be a member, including individuals, corporations, foreigners and foreign entities, and even other LLCs. However, some entities cannot create LLCs, including banks and insurance companies.
An LLC is a more formal partnership agreement which requires that the articles be filed with the state. An LLC is much easier to set up than a company and offers more flexibility and protection.
LLCs do not pay taxes themselves. Instead, profits and losses are recorded on the owners’ personal tax returns. If fraud is detected or if a business has failed to meet legal and reporting requirements, creditors can sue members.
Member salaries are considered operating expenses and are deducted from the profits of the business.
Form an LLC
Although the requirements for LLCs may vary by state, there are generally commonalities at all levels. The very first thing owners or members need to do is choose a name.
Once this is done, the articles must be documented and filed with the state. These sections set out the rights, powers, duties, responsibilities and other obligations of each member of the LLC. Other information included in the documents includes the names and addresses of the members of the LLC, the name of the registered agent of the LLC and the statement of intent of the business.
The statutes must be accompanied by a fee paid directly to the State. Administrative formalities and additional costs must also be submitted at the federal level in order to obtain an Employer Identification Number (EIN).
- Limited liability companies are corporate structures in the United States where the owners are not personally liable for the debts or liabilities of the company.
- Regulations regarding LLCs vary from state to state.
- Any entity may form an LLC, including individuals and companies; however, banks and insurance companies cannot.
- LLCs do not pay taxes – their profits and losses are passed on to members, who claim them in their tax returns.
Pros and Cons of LLCs
The main reason that business owners choose to take the LLC route is to limit the personal liability of directors. Many view an LLC as a mixture of a partnership, which is a mere business formation of two or more owners under an agreement, and a company, which has certain liability protections.
Although LLCs have some attractive features, they also have several drawbacks, particularly with regard to the structure of a company. Under state law, an LLC can be dissolved upon the death or bankruptcy of a member. This contrasts with a society, which can exist in perpetuity. An LLC may not be an appropriate option when the ultimate goal of the founder is to become a publicly traded company.
Limited liability company against partnership
The main difference between a partnership and an LLC is that an LLC separates the company’s business assets from the owners’ personal assets, isolating the owners from the LLC’s debts and liabilities.
An LLC works the same way as a partnership, in that the profits of the business are passed on to the owners’ tax returns. The losses can be used to offset other income, but up to the amount invested. The LLC only produces an informative tax return.
In the event of the sale or transfer of the business, a business continuation agreement is the only way to ensure the smooth transfer of interest when one of the owners leaves or dies. Without a business continuation agreement, the remaining partners must dissolve the LLC and create a new one if a partner files for bankruptcy or dies.