If you’ve ever wondered what is an LLC or you’re curious about the types and practices of LLCs because you’d like to start one, this article is for you.
Apart from explaining exactly what an LLC is and giving you a detailed overview of the types of LLCs, we’ll cover how to know whether you should start an LLC, how LLCs are taxed, different LLC examples, and give you an overview of the pros and cons associated with LLCs.
Let’s start by defining what an LLC is.
What Is a Limited Liability Company (LLC)?
A limited liability company (LLC) is a type of business entity particular for the United States, wherein the owners of the company are protected from personal liability for the company’s debts or liabilities. Essentially, it protects the owners from various lawsuits. In case of a debt or a claim, the owners can’t be pursued for repayment. LLCs contain the characteristics of a partnership and a corporation, which is why sometimes it can be hard to differentiate between the two.
Types of LLCs
When discussing LLCs, it’s important to distinguish between the various types of LLCs. Generally speaking, there are single-member, multi-member, domestic, foreign, professional, series, and anonymous LLCs.
Let’s explore them one by one.
As their name suggests, this type of LLC usually entails a sole entrepreneur. They’re great for individual business owners because they’re usually quite cost-effective to set up and require very little paperwork. Additionally, you’ll be the only one making the decisions regarding the LLC, so you won’t have to compromise or negotiate with other owners. Another benefit of single-member LLCs is that the tax system is quite straightforward.
Needless to say, there are also some disadvantages associated with single-member LLCs. For instance, if you’re a sole entrepreneur, you’re the only one who will be held responsible in case anything occurs. It’s up to you to decide if the benefits of owning a single-member LLC outweigh the disadvantages.
Unsurprisingly, multi-member LLCs are comprised of several different members. There is no limit as to how many members multi-member LLC can contain and where the members come from, which is always a plus. Apart from other entrepreneurs, other corporations can also be members of multi-member LLCs.
Some of the disadvantages include having to go through more paperwork regarding taxation. Additionally, there are more chances of disagreement among the members and incongruence between their goals and visions regarding the company.
A domestic LLC is an LLC whose business is carried out in the state where it was formed. As you might know, every state has different laws and regulations regarding LLCs, which is why some entrepreneurs choose to form foreign LLCs.
As opposed to domestic LLCs, foreign LLCs are formed in a state that’s different from the state where the business is managed. Domestic LLCs that extend their business in a new state need to be registered as a foreign LLC. For instance, if your LLC is registered in Texas but you live in North Dakota, your LLC would be considered foreign in California.
There are many benefits to starting foreign LLCs; mainly, it allows you to choose states with advantageous laws to conduct business and favourable taxing policies. On the other hand, having a business in another state implies more organization and keeping up with the laws of a different state, which can be quite consuming. In addition, it can be quite expensive, since you’ll need to file taxes across different states.
A professional LLC is an LLC that’s designed for licenced professionals, like lawyers and doctors. One of their biggest advantages is that they’re quite easy to set up. Considering the fragile nature of some of the occupations covered under PLLCs, individual members won’t be personally liable in case a lawsuit occurs, which is an amazing advantage. Comparatively, they’re also not that expensive to set up, which is why they’re a go-to option for many professionals.
In order for a PLLC to be formed, some members of the LLC have to have credentials and licences which adhere to the state where the LLC is formed.
It’s important to note that California is the only exception to forming PLLCs. In California, you can’t form a PLLC; you’d have to form a limited liability partnership instead. Or, if your budget allows for it, a professional corporation. In some states, there are restrictions as to who can form PLLCs, so make sure you consult a legal advisor or do your research if you’re interested in setting up a PLLC.
A series LLC differs from other types of LLCs because it entails a parent/umbrella LLC that provides protection for all its businesses or series LLCs. The series LLCs differ from other LLCs in terms of management and assets. Creating series LLCs is easier than setting up multiple LLCs from scratch, which is why many business owners prefer to go with them. Another benefit is that they’re easier to manage and less expensive to set up.
Not all states allow series LLCs, though. Currently, the only states in which you could form a series LLC are Alabama, Delaware, District of Columbia, Illinois, Iowa, Indiana, Kansas, Missouri, Montana, Nevada, Oklahoma, Tennessee, Texas, and Utah.
An anonymous LLC is one where the members’ and owners’ identities aren’t disclosed. They’re a great option for entrepreneurs who want to protect their privacy and keep their names out of the public record. In case the outcome of the LLC isn’t as planned, or it’s involved in practices that could damage the reputation of those involved, the members of anonymous LLCs would be completely protected.
The main drawback of setting up an anonymous LLC is that if a party decides to sue you, an attorney could file a subpoena that would require for the owner’s identity to be disclosed.
Pros of LLCs
Now that we’ve gone through the types of LLCs that exist, let’s see some of the benefits that are associated with this type of company.
One of the reasons many business owners go for LLCs is because of pass-through taxation.
LLCs owners qualify for pass-through taxation, meaning they don’t have to pay taxes on the entity level. Instead, the owners pay personal income taxes covering their share of the business.
LLC owners often qualify for a tax deduction, which varies from year to year.
Protection of Assets
As we mentioned earlier, one of the main advantages of LLCs is that the owner is never liable for any lawsuits or claims. Therefore, the owner’s assets are completely protected from any freezing or collecting. This includes the owner’s bank accounts, real estate, and any other possessions. With that said, the company isn’t immune to the collection of assets, so keep that in mind.
Unlimited Number of Members
Another great benefit that comes with forming an LLC is that there’s no limit to the number of members the company has. Whether you want to form a company by yourself or intend on having a company with hundreds of members, there won’t be an issue.
Easy to Set Up and Operate
Most LLCs are incredibly easy to set up and operate, especially compared to other business entities. If you’re an entrepreneur who’s just starting out, or you simply don’t want to get entangled with convoluted operating systems and structures, then LLCs are a great option for you. You won’t have to spend hours holding unnecessary meetings or getting involved with many other burdens that come with having a corporation.
In terms of multi-member LLCs, one amazing benefit is that the members get to decide how to share their profits. Unlike corporations which rely on the number of shares each member has, LLC members have complete autonomy over how the profits are distributed.
Cons of LLCs
While there are many benefits that come with forming an LLC, there are also some disadvantages you should be aware of.
LLCs Can Be Expensive
One of the main drawbacks of forming an LLC is that it can be quite an expensive process, depending on the type of LLC you intend to create, especially compared to being a sole proprietor.
The cost of setting up an LLC differs from state to state. Some states are more expensive than others, which is why many entrepreneurs go for foreign LLCs. Apart from the cost of setting up the LLC, you also have to factor in the cost of annual fees and taxes to determine the true cost of an LLC in your state.
Finding Outside Investors
Another drawback associated with creating LLCs is that it can be quite hard to find outside investors since many of them prefer investing in corporations due to the possibility of owning stock in the corporation. With that said, many outside investors aren’t opposed to investing in LLCs, but it’s important to keep in mind that the process of finding outside investors can be difficult.
Where to Form Your LLC
If you’re new to LLCs, it’s only natural that you’re debating where you should form your LLC. You might be weighing in the pros and cons of forming a domestic LLC versus a foreign one.
If you want to avoid the fuss of paying filing and maintenance fees and the difficulty of keeping up with the laws of two separate states, then we recommend registering your LLC in the state that it’s started in, i.e. creating a domestic LLC. Domestic LLCs are also a good idea for those who don’t have a lot of experience in the business world and operate on a small budget.
Are you curious about which well-known businesses are actually LLCs? Here are the most famous LLC companies that you’ve most likely heard of.
Alphabet, a child company of Google, is a well-known LLC. In the world of technology, one of the most accomplished LLCs is Apple, founded by Steve Jobs. Facebook, one of the most used social media companies, also began as an LLC.
Other famous LLCs include Pepsi-Cola, eBay, Sony, and Nike.
LLCs and Taxing
There is a lot of flexibility when it comes to taxing and LLCs. As we mentioned earlier, LLCs utilize pass-through taxation, meaning the LLC itself doesn’t pay taxes on the income. Depending on the number of members that the LLC has, it can be taxed as a sole proprietorship or a partnership. LLC members are considered self-employed, so they pay self-employment taxes on the profits from the LLC.
There are other options when it comes to taxation. For instance, taxing as an S corporation is quite popular for bigger LLCs.
What Is the Difference Between an LLC and a Partnership?
A common dilemma many entrepreneurs who seek to form an LLC have is differentiating between an LLC and a partnership.
The main difference between an LLC and a partnership is that, in an LLC, the company’s assets are separate from the members’ assets. Additionally, the members are at no point liable for any debts, claims, or lawsuits that the company might undergo, which isn’t the case with members of a partnership.
Partnerships are, generally speaking, less expensive to create and maintain the fees of than LLCs.
Another difference between an LLC and a partnership is that there can be a single-member LLC, whereas a partnership is typically a business alliance between two or more owners.
In addition, in a partnership, you must make a partnership agreement, whereas in an LLC, you make an operating agreement.
One of the many things they have in common is that both LLCs and partnerships can utilize pass-through taxation.
Differences To Other Business Structures
If you like to learn about how LLCs differ from other business structures have a look at the following guides:
- What is the Difference Between an LLC and an LLP?
- What is the Difference Between an LLC and INC?
- What Is the Difference Between an LLC and Sole Proprietorship?
- What is the Difference Between an LLC and a Corporation?
- What is the Difference Between an LLC and an S Corp?
Should I Form an LLC?
So, if you’re still not convinced whether or not you should form an LLC, here are some pointers that can hopefully guide you in the right direction and help you make a good decision.
Forming an LLC is a good idea:
- If you’d like to be protected against lawsuits and debts as a business owner;
- If you’d like for your personal assets to be protected;
- If you like the thought of having a company with favourable taxation practices;
- If you’d like to add more members to your business without a lot of costs;
How Many Members Can an LLC Have?
One of the many advantages of starting an LLC is that there is no upper limit when it comes to the number of members it can have. If you wish so, you could start a single-member LLC that, as its name suggests, only has one member, or you could form a multi-member LLC that contains multiple members.
With that said, the only exception to this rule is that LLCs, which are taxed as S corporations, can only have up to 100 members.
How Long Does It Take to Form an LLC?
Unlike some other business entities, LLCs are quite easy to form. The usual process takes anywhere from two to three weeks, depending on the state where you want your LLC to be registered in.
What Is the Difference Between an LLC and an LTD Company?
Both LLCs and LTDs are limited in liability. The main difference between these two types of business entities is that an LLC is a lot cheaper to set up and the taxes are based on the personal income of the owners, whereas LTD companies are taxable as corporations.
What Is a Registered Agent?
This is a common question people who are looking to start an LLC have. A registered agent is a person or a business entity that accepts tax and papers on your behalf. They’re called registered agents because you submit a form to the state where they are registered.
We hope this article gave you a good idea of what is an LLC, the types of LLCs out there, and some of the pros and cons which are associated with forming an LLC.
In any case, if you’re interested in creating a business entity that protects your personal assets and protects you against lawsuits and claims, then LLC is a good idea for you.