LLC stands for Limited Liability Company. Limited liability means that the business is structured such that personal assets are protected if the business is sued in court. Limited Liability companies can either consist of one person known as the single member LLC, or they may be formed and owned by several persons known to form what is known as multi-member LLC.
The biggest advantage of forming your startup company as an LLC is that unlike general partnerships or sole proprietorships, your personal assets as an entrepreneur are protected from any lawsuits brought against the business. Moreover, they give your business more credibility and is easier to form and maintain as compared to the standard C-corporation. Another advantage is that you avoid double taxation. Check out this in-depth Legalzoom LLC reviews page
Types of LLCs
Most LLCs have similar features that combine the best feature of other types of business entities including pass-through taxation and limited liability. The following are the most popular LLC types you could form:1) Domestic LLC – This is an LLC that conducts its operations in the state in which it registered.
2) Foreign LLC – When an already registered LLC decides to expand operations to a new state where it has to be registered as a foreign LLC. For instance, a business that was registered in Florida that opens a new office in California will need to register in California as a Foreign LLC.
3) Professional LLC – This is an LLC that is formed to offer professional services such as a legal or medical practice. This type of company needs the professional members of the LLC to have state licenses certifying that they have the necessary professional qualifications to practice in the state.
4) Series LLC – This is the type of LLC that has one LLC provide blanket cover limited liability for several child businesses. These child businesses also have limited liability protection from the actions of the other businesses operating from the single series LLC.
How to Create a Limited Liability Company
The process for creating an LLC is pretty much straight forward:
1) You often need to go to the Secretary of State in your state search, choose and then reserve the legal name for your business.
2) You will then write up and submit your Articles of Incorporation to the Secretary of State.
3) Decide on the persons responsible for running the business (members or managers).
4) Decide how many members your company will have.
5) Apply for your company’s license including other certificates that apply for your given industry.
6) Submit Form SS-4 or if you like, go to the IRS’s website and get your Employer Identification Number.
7) Apply for any other certifications and licenses that are required by local government and state agencies.
Advantages of an LLC
1) Protection of Personal Assets– Your personal assets are protected from any lawsuits or debts of the business, as long as the charges are not related to criminal behavior or fraud.
2) Single Taxation – You avoid double taxation as all the profits are declared on individual tax returns. This is as opposed to a C-Corporation where profits are taxed prior to distribution and then on individual returns.
3) Simplicity – The LLC is one of the easiest type of company to form as the process is relatively pain-free and the company easy to maintain as compared to say S-Corporations or C-Corporations. Moreover, you do not have to record company resolutions and meetings, hold yearly meetings or have formal officer roles.
4) Increased Credibility – An LLC makes your business more credible as business partners and customers love to do business with this type of company as compared to business entities such as partnerships or sole proprietorships.
5) Easy Access to Lines of Credit and Loans – An LLC has better chances of getting access to lines of credit and business loans that other informal businesses cannot access.
Disadvantages of Starting an LLC
Forming an LLC has certain advantages though there are a few disadvantages to it:
1) Growth potential is limited – It is impossible to issue stock or shares to investors as compared to other businesses such as the C-Corp or the S-Corp.
2) Lack of uniformity – The rules and regulations for LLCs vary from state to state which can make expansion quite a complicated affair.
3) Self-employment tax – In many states the earnings of your LLC will be subjected to self-employment taxes.
4) Tax obligations on the appreciation of assets – Your company could be subject to extra taxation when there is an appreciation of its assets. You could be particularly vulnerable particularly if you are converting an existing business into an LLC.
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