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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 is typically closer to that of a sole proprietorship because profits and losses are reported on an owner’s personal tax return. However, an LLC can also choose to be taxed as a corporation (either an S Corp or C Corp) if it meets certain criteria.

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 generally no protection for liability, but in this structure, two or more people own the business. General partners have personal liability for the partnership's debts and obligations, though they do enjoy liability protection from the actions of other partners.
  • 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, and it provides protections for the owner just as a corporation would. The specific costs and requirements can vary depending on the state where the LLC is being formed.

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:

  • Google
  • Exxon Mobile
  • General Electric
  • Apple
  • Pepsi-Cola
  • Nike
  • eBay

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.

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Benefits of an LLC

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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. Though, it does provide some liability protection, as the owner's personal assets are generally shielded from business debts and obligations. Nonetheless, 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.

See LLC Formation Pricing by State

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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ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.


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Limited Liability Company

LLC

Florida

Asked on Jun 14, 2023

How to set up an LLC?

I am a budding entrepreneur looking to start my own business. I understand that forming a Limited Liability Company (LLC) is a great way to protect my personal assets and manage my business operations. I have done some research on the process, but I am looking to get the best legal advice on how to set up my LLC properly.

Daniel D.

Answered Jul 25, 2023

This is a great question to ask. The first step is to register your business with the Florida Department of State on Sunbiz; that will get you legally set up to get rolling. The second step to setting up your LLC properly is to adopt an operating agreement. This agreement tells how the business will run, how it will handle new members and the powers that existing members and/or managers will have amongst other important paragraphs to have. You can be creative as you want with an operating agreement. Before you adopt your operating agreement you should consider topics like: do i want it to be run by members or managers; do i plan on having partners in the future or now; am I going to look for investors at some point? These questions can help you draft an operating agreement that will suit your needs as a business owner and show others that you were strategic in thinking of the future. You can also use an operating agreement for business succession planning incase you are incapacitated or die.

Read 1 attorney answer>

Startup

LLC

Texas

Asked on Oct 26, 2023

How is ownership defined in LLC formation?

I am starting a new business and am looking to form a limited liability company (LLC). I understand that an LLC is a business structure that can help protect my personal assets from any debts or liabilities of the business. I am looking to understand how the ownership of the LLC is defined and how it affects the legal and financial structure of the LLC. I am hoping to find out what type of paperwork and/or agreements need to be drawn up in order to set up the LLC properly.

Jimmy V.

Answered Nov 3, 2023

Owners of LLCs are called "Members." Members make an initial contribution of cash or other property to the LLC in exchange for their Membership Interests in the LLC. The Members can run the LLC themselves if they like. This is common in LLCs with one or only a few Members. If there are many Members, they may decide to appoint a Manager to run the LLC. Managers can be owners, and vice versa.

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LLC

North Carolina

Asked on Oct 26, 2023

How to amend details after LLC formation?

I recently formed a LLC for my business and I am now looking to make some changes to the details of the LLC. I am unsure of the process of making these amendments and am seeking advice on how to go about making these changes legally.

N'kia N.

Answered Oct 30, 2023

Making changes to certain aspects of a North Carolina LLC is usually not very difficult, particularly if the LLC is recently formed. For example, if the desired changes are related to the LLC's Articles of Incorporation, filing amended Articles will likely be sufficient. Similarly, if the desired changes are related to the LLC's Operating Agreement, signing an amended Agreement will likely be the key. The processes for making other types of changes will vary based on the specific facts. When making changes to any aspect of a North Carolina LLC, it is important to comply with the LLC's operating agreement, the LLC statute, and other applicable laws. For legal advice on making changes to your North Carolina LLC, you should consider consulting with a knowledgeable business or corporate attorney. Good luck!

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Startup

LLC

Alabama

Asked on Feb 10, 2023

State of Texas - questions regarding an online business (Nanny Placement Agency) in the Houston area.

Seeking an attorney for advice as to what I need to start up an online business, specifically a Nanny Placement Agency. Do I need a license in the state of Texas and what do I need to protect myself against possible unforeseen lawsuits. I will be living in the Houston area soon but want to start my online business remotely (Michigan) asap. I have an LLC in Michigan already, I assume I may need one in Texas as well, is this correct?

Jimmy V.

Answered Feb 24, 2023

Hello, I can help you with this project. I’m a semi-retired, long-time Texas attorney with substantial experience in business and corporate law. I counsel startups and small businesses, help them set up corporations or LLCs across the country and draft a variety of contracts and corporate documents. You should have an LLC for liability protections, whether it's in Michigan or in Texas. Actually, you would be better off organizing a Texas LLC because your Michigan LLC would have to register in Texas so you would be paying extra fees. There is no licensing requirement for nanny agencies in Texas. If you are interested, I will make you a flat fee bid to set up an LLC for you here in Texas. Thx. JV PS For more information about business entities, download a free copy of my ebook "Should Your Small Business Become a Corporation or an LLC? A Look at Liabilities, State & Federal Taxation & More!" from my website types-of-business-ownership.com

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Corporate

LLC

California

Asked on Oct 29, 2023

How is management structure set post-formation?

I am in the process of forming a Limited Liability Company (LLC) and I am looking to understand how the management structure will be set up post-formation. I have a business partner who will be a co-owner of the LLC and I am interested in learning the best way to ensure that both of our interests are represented in the management structure. Furthermore, I am interested in learning what type of documentation will be needed to ensure that our management structure is properly set up and in compliance with applicable laws.

Sarah S.

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When forming a Limited Liability Company (LLC) with a business partner, it's crucial to establish a clear and effective management structure to represent both of your interests. To do so, you should create an Operating Agreement, a customizable document that outlines the management structure, ownership percentages, and roles and responsibilities of each member. You can choose between a member-managed or manager-managed LLC, depending on your and your partner's roles and preferences. Defining ownership percentages, management responsibilities, voting rights, meeting procedures, and compliance with state laws is essential. Legal counsel should be consulted to draft the Operating Agreement and ensure compliance with specific state regulations, and it's important to regularly review and update the document to adapt to changes as your business evolves.

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