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What is an LLC?
An LLC, or Limited Liability Company, is one type of legal entity that can be formed to operate a business. Forming an LLC provides a business owner with asset protection just like a corporation because it separates the business entity from the owners. The tax structure of an LLC, however, is closer to that of a sole proprietorship because profits and losses are reported on an owner’s personal tax return.
An LLC is just one way that a business owner can organize their business. Other options include:
- Sole Proprietorship: In sole proprietorships , one person owns the business and does not have the benefit of any liability protection.
- General Partnerships: A general partnership is like a sole proprietorship in that there is no protection for liability, but in this structure, two or more people own the business.
- Limited Partnerships: In limited partnerships structure, general partners operate the business and have personal liability and limited partners while they contribute to the business, do not have personal liability.
- Corporation: A corporation ( S Corp , C-Corp , etc.) is owned by shareholders or stockholders and provides the most liability protection for owners. This business structure can be complicated because the shareholders must elect a board of directors to make business decisions and run the day-to-day operations of the business.
An LLC is a great option for small businesses just starting out because like a sole proprietorship, it is easier and less expensive to form than a corporation, but it provides protections for the owner just as a corporation would.
For a more in-depth explanation of LLCs, click here.
What is an LLC Used For?
If you are starting your own business, there are a lot of things to take into consideration when choosing the form of a business entity like taxes, liability protection, ownership structure, management, and expenses.
An LLC will allow a business owner to limit their personal liability for business debts, raise capital from investors, and benefit from many tax advantages.
Although we generally associate an LLC with small businesses like the local coffee shop, even large multi-million-dollar business entities can be formed as an LLC. Some famous businesses that have an entity that is an LLC are:
- Exxon Mobile
- General Electric
Click here for more information about LLCs directly from the IRS website.
Benefits and Downsides to LLCs
An LLC will provide a business owner with both benefits and downsides. It is important to weigh these options when deciding which business formation is right for you.
Benefits of an LLC
- Limiting Personal Liability for Business Debts: An LLC protects an owner from certain liabilities, one of these is liability for business debts. An LLC separates the owner from the business so in the event of a lawsuit or claim of a creditor, only business assets are at risk to be claimed to satisfy a business debt. An owner’s personal property and assets like a house or personal bank account are protected. This is generally the most important reason a business owner chooses an LLC over a sole proprietorship.
- Ability to Raise Capital from Investors: The owner of an LLC has the option to bring in investors who can contribute additional capital, property, or even services to the business.
- Tax Advantages: When operating an LLC, the owner will not have to file a separate tax return for the business. LLCs are often called a “ pass through entity ” because profits and losses from the business pass through the business to the owner’s personal tax return. One benefit of this tax structure is avoiding the “double tax” that most corporations are subject to where income is taxed first under the corporation and then again at the individual level.
- Simplicity and Flexibility: An LLC is one of the most simple and easy to form legal entity. It is less expensive and easier to maintain because it does not require directors and shareholders like a corporation. An LLC also provides endless flexibility for a business owner. There are no limits on the number of owners allowed so an owner or owners can choose how to run and manage their business. An LLC with more than one owner can also choose how they want to be taxed whether it be like a sole proprietorship or like a corporation. Opting for an LLC to be taxed like a corporation has its own unique business benefits.
- Credibility : Forming an LLC makes your business its own legal business entity. This makes your business look and feel more professional and credible to consumers.
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Disadvantages of an LLC
Even though the business formation of an LLC provides the owner with great liability protections, there are limits to this protection. An LLC owner will still be personally liable in a lawsuit for their own negligence, even if the claim is related to the business.
An LLC also does not protect an owner from losses due to fires, floods, lawsuits, or an economic downtown. Therefore, it is important to carry business insurance on your LLC.
Another disadvantage of an LLC is the lack of investment opportunities. If an owner is seeking to bring in outside investors, there are no stock options available in an LLC like there are in a corporation. Normally, an investor will trade funding for a share in the business stock. Without the available stock, there is less incentive for an investor to invest in an LLC.
Who Should Form an LLC?
If you are debating whether an LLC is the right business formation for you, ask yourself these two questions: “Do I have co-owners or employees?” and “Does my business have significant risks?”. If you answered yes to either of these questions, an LLC would benefit your business.
If you have a co-owner or employees, your business could potentially be sued for the actions of these people. Without the protection of an LLC, the business owner’s personal assets could be at risk in this lawsuit.
Opening any business is risky, however some businesses pose more of a risk than others. Many property rental companies choose to use an LLC because each rental property will be its own entity. Failure or issues with one property will not put the other properties in jeopardy.
Click here to read about articles of organization , which are required to be filed when starting an LLC.
How Are LLCs Taxed?
Tax advantages are one of the main reasons a business owner will opt for an LLC over a corporation. An LLC is taxed by what is called “pass-through taxation”. This means that the profits and losses of the business pass through the business and are filed with the owner’s personal tax return. The profits and losses will be taxed based on personal tax rates.
This tax structure is much like that of a sole proprietorship. The LLC owner will report their businesses profits, losses, and deductions to the IRS using a Schedule C form filed with their personal tax return. If there is more than one owner, each owner will file profit and losses with their own personal tax return.
To read more about pass through entities, check out this article.
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Meet some of our LLC Lawyers
Terry Brennan is an experienced corporate, intellectual property and emerging company transactions attorney who has been a partner at two national Wall Street law firms and a trusted corporate counsel. He focuses on providing practical, cost-efficient and creative legal advice to entrepreneurs, established enterprises and investors for business, corporate finance, intellectual property and technology transactions. As a partner at prominent law firms, Terry's work centered around financing, mergers and acquisitions, joint ventures, securities transactions, outsourcing and structuring of business entities to protect, license, finance and commercialize technology, manufacturing, digital media, intellectual property, entertainment and financial assets. As the General Counsel of IBAX Healthcare Systems, Terry was responsible for all legal and related business matters including health information systems licensing agreements, merger and acquisitions, product development and regulatory issues, contract administration, and litigation. Terry is a graduate of the Georgetown University Law Center, where he was an Editor of the law review. He is active in a number of economic development, entrepreneurial accelerators, veterans and civic organizations in Florida and New York.
I'm a Washington-licensed lawyer specializing in trademark practice and with an extensive trademark education and academic background. I currently work with domestic and international businesses seeking trademark protection in the U.S. by conducting trademark searches, providing legal advice, submitting USPTO applications, and preparing responses to office actions. I'm passionate about trademark law and always looking forward to helping small and medium businesses promote their value by having a registered federal trademark. If you have questions or concerns about trademark/copyright/IP licensing and require legal advice, feel free to contact me so we can have a first chat.
Mr. Pomeranz serves as the principal of Pomeranz Law PLLC, a boutique law firm representing clients across myriad industries and verticals. Before founding the firm, Mr. Pomeranz served as Senior Vice President, Legal & Compliance and General Counsel of Mortgage Connect, LP in 2017. Mr. Pomeranz also served as Counsel, Transactions for Altisource Portfolio Solutions S.A. (NASDAQ: ASPS) beginning in 2013, and was based in the company’s C-Suite in Luxembourg City, Luxembourg. Mr. Pomeranz began his career with Mainline Information Systems, Inc. as an in-house attorney.
I have 10 years experience providing general counsel, in the form practical and timely legal advice, under strict deadlines to individuals and various business unit stakeholders, balancing commercial needs with legal concerns at large corporations and start-ups. I am skilled at reviewing, analyzing, drafting and negotiating commercial and government contracts globally for the procurement and sale of services and goods. I also help clients ensure compliance with regulations (including data privacy), laws and contractual obligations and protect, enforce and exploit intellectual property rights and support in the development of IP strategy. I am a Certified Information Privacy Professional/United States (CIPP/US) licensed by the IAPP - International Association of Privacy Professionals.
Over 15 year experience drafting, reviewing and negotiating contracts both as in-house counsel and in law firms, including my own law firm.
Rinky S. Parwani began her career practicing law in Beverly Hills, California handling high profile complex litigation and entertainment law matters. Later, her practice turned transactional to Lake Tahoe, California with a focus on business startups, trademarks, real estate resort development and government law. After leaving California, she also served as in-house counsel for a major lending corporation headquartered in Des Moines, Iowa as well as a Senior Vice President of Compliance for a fortune 500 mortgage operation in Dallas, Texas prior to opening Parwani Law, P.A. in Tampa, Florida. She has represented various sophisticated individual, government and corporate clients and counseled in a variety of litigation and corporate matters throughout her career. Ms. Parwani also has prior experience with state and federal consumer lending laws for unsecured credit cards, revolving credit, secured loans, retail credit, sales finance and mortgage loans. She also has served as a special magistrate and legal counsel for numerous Florida County Value Adjustment Boards. Her practice varies significantly from unique federal and state litigation cases to transactional matters. Born and raised in Des Moines, Iowa, Ms. Parwani worked in private accounting for several years prior to law school. Her background includes a Certified Public Accountant (CPA) certificate from Iowa (currently the license is inactive) and a Certified Management Accountant (CMA) designation (currently the designation is inactive). Ms. Parwani or the firm is currently a member of the following organizations: Hillsborough County Bar Association, American Bar Association, Tampa Bay Bankruptcy Bar Association, National Association of Consumer Bankruptcy Attorneys, and the American Immigration Lawyers Association. She is a Fellow of the American Bar Association. Ms. Parwani is a frequent volunteer for Fox Channel 13 Tampa Bay Ask-A-Lawyer. She has published an article entitled "Advising Your Client in Foreclosure" in the Stetson Law Review, Volume 41, No. 3, Spring 2012 Foreclosure Symposium Edition. She is a frequent continuing legal education speaker and has also taught bankruptcy seminars for the American Bar Association and Amstar Litigation. She was commissioned by the Governor of Kentucky as a Kentucky Colonel. In addition, she teaches Immigration Law, Bankruptcy Law and Legal Research and Writing as an adjunct faculty instructor at the Hillsborough Community College Ybor campus in the paralegal studies program.
Possesses extensive experience in the areas of civil and transactional law, as well as commercial litigation and have been in practice since 1998. I addition I have done numerous blue sky and SEC exempt stock sales, mergers, conversions from corporations to limited liability company, and asset purchases. I have worked in commercial litigation, corporate and transactional law, intellectual property and bankruptcy. In recent years I have expanded my practice to include family law, personal injury, medical malpractice, and wrongful death.