LLC (Limited Liability Company): The Ultimate Guide to Starting Your Busines

LLC (limited liability company)

In this paper a brief overview of what it means to understand an LLC commonly referred to as a Limited Liability Company.

What is an LLC?

An LLC is a business structure choice that can only be taken in the United States and it has both the corporate protection in the liability aspect as well as the taxation and management structure of a partnership. Owing to its simplicity and legal consequences concerning the business owners, this structure is mostly chosen by small to the medium business.LLC

This paper aims to examine the Key Features of an LLC.

Limited Liability: The owners are not liable for the debts and liabilities of the business, they are called members.

Pass-Through Taxation: Profits and losses directly on the members’ income tax returns, thus the taxation is not double.

Flexible Management: An LLC can be member-managed or manager-managed which provides flexibility of operation.

No Ownership Restrictions: An LLC can be single or multi-membered and such members can be real individuals, other corporations, and other LLCs.LLC (limited liability company)

Pros of forming an LLC

1. Personal Asset Protection Indeed, one of the main benefits that any new business owner will derive from an LLC is that it shields him/her from legal action involving the business. If the LLC confronts the problem, for instance, it takes a loan or faces a legal claim, the members’ home or car cannot be seized.
2. Tax Flexibility LLCs come with several choices of taxation as follows; Consequently, LLCs are given a pass-through tax status, which means that the income and expenses of an LLC are reported on its members’ individual tax returns. However, LLCs can opt to be taxed as a corp or C corp or S corp depending on what can benefit the business the most.
3. Modularity is another critical aspect of a business because it entails ease of formation of new structures or organizations with enhanced specifications for the operation of the business. In comparison with corporations, LLCs are very simple and cost effective to form and sustain. The paperwork basically much less and the legal formalities are not as strict as the corporations for an LLC.
4. Flexibility in Management LLCs can be managed in any way which is one of the biggest advantages of choosing this type of structure. The running of the LLC is regulated by the members; however, the members can opt to appoint managers to oversee the operational issues. It is advantageous especially when there is a fluctuation in the degree of commitment of the owners of the business.
5. Credibility and Consumer Trust Business entity formation such as LLC will give your business a bloated outlook. This has a way of convincing the public of your seriousness in the business and it also gives your business a more professional look to customer, suppliers and even investors.

Disadvantages of an LLC

1. Self-Employment Taxes
   Although LLCs are acknowledged for the dependent tax treatment granted to their members, they are compelled to pay the applicable Self-employment taxes which consists of Social Security and Medicare taxes on the profits due to their membership in the LLC. This can sometimes lead to payment of more taxes as it is compared to large business organizations referred to as corporations.
2. Limited Life Span
   Some of the points to consider are as follows, It is true that in some states if a member dies or if the member decides to move out the LLC is dissolved but this can easily be handled through the operating agreement of the LLC. This is different from a corporation since the latter may operate for as long as it is legally allowed to do so without reference to the shareholders’ status.
3. Varying State Regulations
   Rules across the LLC differ from one state to another, which makes it even more challenging if you have your business across the states. Certain rules and regulations also vary from one state to the other in terms of the taxes and fees to be charged to the LLCs as well as the formation procedures.
4. Difficulty in Raising Capital
   One of the limitations of the LLCs is that may be harder for it to issue capital than a corporation. Some investors may favor investing in corporations for the fact that the corporations can issue stocks and LLCs cannot. This can restrain the opportunity of an LLC business to obtain outside funding.LLC (limited liability company)

How to Choose an LLC

1. Choose a Business Name
   The first step in formulating the LLC’s creation involves the selection of an appropriate business name. It must also be a name which has not been used by another establishment and has to adhere to the name acting rules and regulation of the state. It should contain words like limited liability company or the acronym of the LLC For enhanced recognition, the name entered should not be similar to other business titles registered in the same state.LLC (limited liability company)
2. File Articles of Organization
   In order to legally create your LLC you must submit Articles of Organization at the business filing agency in your state. This document contains some of the most crucial and fundamental materials regarding your LLC, starting with the firm’s name, physical location, and the member names. In this step, there is often a filing fee charged for and the also the commencement of exchange of letters between attorneys.LLC (limited liability company)
3. Create an Operating Agreement
   An operating agreement is often not mandatory depending on the state but it is advisable to have one. Thus, this document contains information about the LLC’s ownership and management, members’ rights and responsibilities plans. It can easily facilitate the avoidance of misunderstandings and conflicts, thus making the running of the business efficient.
4. Obtain an EIN
   Federal identification consists of 9 digits and is needed if an EIN is not available or is missing. You fetch it from the IRS; it is essential in various business operations, for instance, creating a business account, paying taxes, or recruiting employees.LLC (limited liability company)
5. Generally, you have to follow Local and State requirements.
   For any item or business activity that you will be involved in, you will require certain licenses and permits and these may vary depending on your area of operation. However, ensure that you consult your state and local guidelines to be on the right side of the law.LLC (limited liability company)
6. File Annual Reports
   Typically, most of the states have a provision that necessitates LLCs to submit an annual report and also to make a payment for the same. This report informs the state on your LLC’s actions and any changes in the ownership or management. It can lead to penalties or dissolution of the LLC if one does not file the said documents.LLC (limited liability company)

Comparison of the Characteristics of LLC with Other Business Structures

1. LLC vs. Sole Proprietorship
   A sole trader is also known as the person who started the business all by him or herself and the business and the person are one. Thus, unlike an LLC, a sole proprietorship does not provide its owner with personal asset protection; the owner’s assets can be used to satisfy the business’s debts. Nonetheless, sole trader is easy to establish than other forms of business and it is not as stringently regulated as other forms of business.LLC (limited liability company)
2. LLC vs. Partnership
   A partnership is like the LLC in the sense that it also follows pass through taxation. However, they do not afford as much liability shield as what one gets from an LLC formation. In a general partnership, all partners are liable for all the liabilities of the business on their personal capacities. And while an LLC also protects shareholder’s equity investment, the shareholder’s liability is limited to the amount of his investment on the business.LLC (limited liability company)
3. LLC vs. Corporation
   Corporations provide limited liability similar to that of LLCs but they are more cumbersome to operate, are liable to be taxed twice unless they choose the S-corporation status. It’s easier for corporations to issue stock which assists in capital acquisition but they are bound by rigorous legal and filing structures. The two differ in their modes of management and taxation but could be less favorable to Investors compared to LLCs.

Taxation Options for LLCs

1. Default Tax Classification According to its default, a one-member LLC is subjected to being taxed like a sole trader, whereas, the several members are subjected to be taxed like partners. In both cases, the LLC does not actually pay taxes on its own; however, depending on the structure of the company, the owners may need to pay taxes on profits. However, every profit and losses are reflected to the members by including in their individual tax returns.LLC (limited liability company)
2. S Corporation Election An LLC has the option of being taxed as an S Corporation, and applies for it by preparing Form 2553 with the Internal Revenue Service. This in turn enables the LLC to avoid payment of some of the self-employment taxes on profits earned. Before the LLC can be classified as an S Corp, there are some necessary conditions that must be met such as; the LLC should have 100 or fewer members and should not issue more than one class of stock.LLC (limited liability company)
3. C Corporation Election An LLC can also choose to be taxed as a C Corporation by filing the form 8832. This might be beneficial mostly for those companies that will re-investing their profits into the company as C Corps are taxed only on the corporate level, and any dividends paid are taxed at the higher personal income tax level. Maintaining Your LLC.LLC (limited liability company)
4. Compliance Requirements Each state has specific rules that each LLC must meet, these are for instance annual filings and such fees as may be necessary. The management of this type of business also needs to keep detailed records of the LLC’s financial and organizational operations.
5. Operating Agreement Updates The operating agreement should be reviewed regularly so as to incorporate recommendations that may be put across by the new members or alteration of the managerial teams.LLC (limited liability company)
6. Ongoing Tax Obligations Members of LLC’s should ensure that they meet their tax requirements each and every time, including the payment of estimated tax relieves and self-employed taxes. It is thus advisable to hire a professional who will be able to assist in compliance and the right utilization of tax strategies.

Conclusion

LLC provides an opportunity for free and protected managing of the business for the majority of Contractors and Suppliers and Buyers during purchasing a business or creating a new one or holding an intermediate status of the enterprise during its development phase. This paper analyzed the advantages and possible disadvantages of LLC formation and acquainted the reader with the main steps of LLC formation and functioning so that every entrepreneurial person can make accurate and conscious choices. Whether you are an individual running your own business or multiple partners in a business, an LLC gives you the necessary protection for the business and its mechanism of operation, taxation policies, and its accountability towards management of the trade.