Understanding LLCsLLCs are one of the most preferred business structures because they combine the protections of a corporation with the flexibility of a smaller business. LLC members enjoy limited liability for their personal assets, options when filing taxes and the freedom to manage their business as they choose. There are many types of LLCs, each regulated by their state of registry. They all share a few key characteristics:
- LLCs are made up of members, also called owners. There is no limit to the number of owners an LLC can have. You can also form an LLC of just one member — a “single-member LLC.” Membership is flexible: individuals, estates, partnerships and organizations can all join LLCs as owners.
- The main benefit of an LLC is that owners take on less risk. Owners carry limited personal liability for any business debts they might incur. This means that their personal assets (like a car, home and bank accounts) are protected should the business owe debts or get into a lawsuit. These kinds of liability protections are unique to LLCs. Sole proprietorships or partnerships don’t extend these kinds of protections to your personal assets.
- LLCs are much less formal than corporations. In an LLC, you don’t have to have annual meetings, denote formal officers, or keep meeting minutes and resolutions.
- All the profits go straight to the LLC owners. Owners report their earnings share on their individual tax return. Profits are only taxed once, unlike corporations who are taxed twice on their earnings. This is called pass-through taxation.
TakeawayAn LLC gives you the best of both worlds: the personal liability protections of a corporation and the pass-through taxation of a sole proprietorship or partnership.Forming an LLC means you can sleep easy knowing:
- Your personal assets are safe if you get sued.
- You’ll pay taxes on your own return.
- You’re free to manage your business how you’d like.
In more detail
How are LLCs formed?To form an LLC, you’ll need to file paperwork with the state called Articles of Organization or a Certificate of Formation. This is most often through the Secretary of State. It’s common to follow up this registration process with an operating agreement, delineation of owner contributions and earnings and outlining the management style.
How are LLCs structured and managed?LLCs can be owned by one person or several people, called “owners.” If an LLC is owned by multiple people, it’s called a multi-member LLC. Alternatively, LLCs owned by a single person are called single-member LLCs. Owners of a multi-member LLC can manage themselves as a group or establish a single manager to govern. These two structures are called “member-managed” and “manager-managed,” respectively.
How are LLCs taxed?LLCs don’t pay business taxes. Instead, they have a pass-through structure. This means that taxes are sent to the members to report profits on their individual tax returns. Owners are responsible for normal income tax and self-employment taxes.
What are the pros and cons of an LLC?Pros of LLCs
- Pass-through taxation means you’re only taxed once
- Personal liability protection (dividing personal and business assets)
- Flexibility in how you operate your business
- Easy to get started
- Start-up costs are higher. An LLC costs more to form and operate than a sole proprietorship or a partnership. You’ll also need to account for annual fees and taxes, which vary from state to state.
- Some states make it difficult to remove members if they leave the business.