LLC Definition

A limited liability company (LLC) defines a business structure that offers owners limited liability of the company. The business entity is neither a corporation nor a partnership, but it is a blend of the two entities. The LLC structure is most often termed as an “unincorporated association” as opposed to a “corporation.” Instead of shareholders or partners, limited liability companies have members. Single owners often benefit from the flexibility of the limited liability corporation.

Members are not the owners of the company nor are they liable for the company’s debts. The liability of a member is limited unlike that of shareholder. The shareholder of a company is liable to pay the balance of any shares held by him or her. Shareholders are liable to pay in corporations even if the liabilities exceed the shareholder’s assets.

Members are not responsible for the debts. Thus, the liability of each member is considered “limited.” If the company is declared insolvent, the member will not owe any more than their outstanding amount of shares, which is typically outlined in a memorandum. Thus the members are protected from total loss.

What is the Structure of a LLC?

A LLC can consist of an unlimited number of members. This is left up to the judgment of the owners. A single member can also form a LLC. In a corporation, shareholders must establish bylaws, have meetings and record meetings. A LLC does not have these requirements. Members simply need to file an Articles of Organization with the Secretary of State, according to the state’s guidelines. After the fees are paid, the entity will become a statutory creation.

What Are The Main Advantages of the LLC ?

No Personal Liability of Business Debts

The LLC offers its owners protection from any personal liability of business debts. Courts, however, can intervene and place personal responsibility on the owners in the event of fraud or other types of misrepresentation. Owners must be mindful of their business practices to avoid personal demise if debt is incurred.

Owner’s Claim Profits and Losses

In regards to taxes, the LLC operates as a “pass through” entity. This means that the company can transfer the company’s profits and loss on to the owners. The owners will reflect the company’s profits and losses on their personal tax returns.

Flexible Management

The company structure may be organized in the way the owners desires. There are few restrictions in the way that the company is structured. They also do not face restrictions on the type of owners that participate in the business or in the number of owners either.

Flexible Taxing Options

LLC owners may elect to be taxed as corporations are taxed. The taxes must be paid at the business level on the LLC’s income, rather than taxing each owner. In this instance, The LLCs would file IRS Form 8832. The organization may be treated as a C corporation or S corporation. Most LLCs prefer to be taxed as an S corporation, which offers self employment tax savings.

In general, LLCs with multiple members will be treated as a partnership in terms taxation. They must file IRS Form 1065. Each member would receive a K-1 statement that designates the share of the profits or losses that should be reported on each member’s tax return.

What Else Should I Know About LLCs?

LLCs are subject to annual reporting fees or franchise taxes that may be associated with filing annual reports. The owners may also be subject to the requirements set forth in the state of incorporation. LLCs are less likely to be subject to acquisitions by investors, and they are useful for real estate companies that seek to protect their owners.