What is an LLC?
The limited liability company or LLC is a flexible business structure
which combines some of the most significant advantages
of partnerships and corporations into one.
Limited liability company defined
The first LLC was formed in Wyoming in 1977. But LLCs caught on like wildfire due to the personal asset protection and tax flexibility they offered their owners.
An LLC is a hybrid business entity, combining many of the positive characteristics of both a corporation and a partnership, presumably giving them the best of both worlds.
Like a corporation, an LLC is a legally distinct entity, separate from its owners. It has the power to sue and be sued, just like a corporation. It provides similar limited liability protection as that of a corporation, but has the pass-through tax benefits of a sole-proprietorship and partnership.
How to form an LLC
An LLC comes into existence when prospective members file a charter document with a state’s business entities department, which is usually the Secretary of State. The owners of an LLC are called members and membership units represent a member’s ownership interest. An LLC can have one or more members.
LLCs offer a flexible management structure. LLCs can be either member-managed or manager-managed. In a member-managed LLC each member has an equal voice in the decision-making processes of the company, much like partners in a partnership.
Limited Liability Protection
Limited liability protection—the foremost benefit of an LLC is the limited liability protection afforded its owners. The members cannot be held liable for company losses, or debts and business credit, and they don’t have to give up personal assets, such as a house or a car, to satisfy those business obligations.
No double taxation—by default LLCs are not subject to double taxation like corporations. An LLC is treated as a pass-through entity, meaning that the company itself will not be taxed unless it elects to be taxed as a corporation. The individual members report all business profits, losses, and expenses on their individual income tax returns.
Fewer operational formalities—LLCs require far less paperwork and record-keeping than a corporation. Most states don’t even require an operating agreement, though it is still a good idea to create one so that you can choose the specific rules that will govern your company. If you do not create an operating agreement, your company will, by default, be governed by the LLC statutes of your state. Most states also do not require LLCs to hold formal annual meetings that are required of corporations.
Flexibility—members can choose to have profits distributed any way they would like. This means whatever percentage of the profits they want to give each member, they have the flexibility to do so regardless of their specific ownership interest
Enhanced credibility—an LLC lends credibility to your business by showing your potential customers, employees, vendors and partners that you have made a formal commitment to your business.