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The Beginner's Guide to Small Business Accounting

Limited Liability Company (LLC)


 

What is a Limited Liability Company or LLC?


A Limited Liability Company is a hybrid between corporation and partnership structures in the United States whereby business owners are given liability protection and pass-through taxation. This means that owners of an LLC are not personally liable for the company’s debts and obtain certain tax advantages. Furthermore, owners of an LLC are called “members” rather than partners or shareholders.



Who should form a Limited Liability Company (LLC)?


Anyone who is starting a business or running one as a sole proprietorship or partnership should consider setting up an LLC. Often, small businesses choose to organize as limited liability companies because of liability protection and pass-through taxation. Generally, anyone can form an LLC. The only exception to this are banks and insurance companies.



What are some examples of an LLC?


There are many examples of LLCs. Many of these are well-known companies and enterprises including SONY, Nike, eBay and IBM.



What are the different types of LLC?


  • Single-owner LLC. This type of limited liability company has a single owner who benefits from liability protection, making it different from a sole proprietorship. A single-owner LLC may have multiple employees, but it has just one sole owner.


  • Multi-member LLC. A multi-member limited liability company has two or more member owners, governed by an operating agreement which sets out each of their individual and collective rights and responsibilities. This agreement will also establish the structure and management of the company.


  • Foreign LLC. In the US all LLC’s must register as such in every state in which they plan to operate and do business. A foreign limited liability company is one that registers and operates in a state that is not its original state of LLC registration. A foreign LLC may also refer to a limited liability company registered in a different country but looking to operate on some level in the US.

  • Series LLC. These types of limited liability companies are made up of two or more independent companies, all of which are managed and taxed separately. They will generally have a parent or umbrella company overseeing them. Each company within the series LLC will have its own investments and responsibility for its own debt.



 

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Benefits of an LLC


  • Limited personal liability. Members are not personally liable for any debts, actions or obligations incurred by their LLC business. For example, personal assets such as your home and bank account cannot be used to collect on business debts.

  • Pass-through taxation. Owners can pass through their business gains and losses on their personal tax return, thus avoiding double taxation. Additionally, members can divide the business’s profits and losses among themselves and decide how much each one claims on their personal tax return.

  • Structural flexibility. First, there is no minimum or maximum limit on the number of members that an LLC can have. Second, members have more choices about the way they can run their business and the decision-making it entails since LLCs don’t follow the formal structure of a corporation, such as a board of directors. That said, all the members of an LLC will share responsibility for the day-to-day operations of their business.



Disadvantages of an LLC


  • Cost. Not only are there filing fees to initiate, there’s also annual filing fees you’ll need to pay in order to keep your entity up and running. The fee amount varies by state, so be sure to check out the relevant secretary of state’s website for more information. There are also additional tax forms each LLC member must take responsibility for, including a company tax filing, K-1s and franchise and excise taxes (if applicable).

  • Required self-employment. LLC members are considered self-employed business owners so there’s no contribution to Social Security and the Medicare system. Instead, members are responsible for paying their own self-employment tax contributions of 15.3% directly to the Internal Revenue Service.

How to form an LLC


There are a number of steps that must be followed in order to form an LLC. We have included some of the main ones here.



01. Choose your location


In order to form a Limited Liability Company, you must first choose the right geographical location. It should be a place where you plan to do business and in consideration of the cost, taxation and LLC requirements that vary from state to state.



02. Select a name


The next step is to choose a name for your LLC so that you can register with the local government under your business name. To facilitate the process of naming a business, you can find some great ideas with the business name generator in just a few clicks.



03. Assign a registered agent


After you have chosen a name, you’ll need to pick a registered agent in your state who will receive official paperwork and legal documents on your business’s behalf.



04. File articles of organization


For this step you will need to provide specific information about your company, in order for it to be registered as an LLC. Different states may have different registration requirements but generally you will have to supply basic and general information about your company to meet these requirements. Examples include business name and type of business.



05. Obtain an Employer Identification Number


Each member will need to obtain their own Employer Identification Number from the IRS, as well as relevant business licenses and in some cases, register for sales and employer taxes.



06. Open a separate business account


For any type of business, it is important to make sure that you separate your personal and business finances. You should open a bank account specifically for your LLC, including its expenses and revenue. This will help you keep a more accurate track of your business activity and entrepreneurship success.



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Related Term

Sole Proprietorship

Related Term

Partnership

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