Limited Liability Company (LLC)
• 25 Feb 22
A limited liability company (LLC) is a simple, low-cost method of structuring your sole proprietorship or small business. Several small-business owners opt for this business structure which is known to offer more protection from personal liability. In this article, we will look at how an LLC works and the steps involved in developing one.
What is a Limited Liability Company (LLC)?
An LLC is a business structure in the United States that combines the elements of a sole proprietorship, a partnership and a corporation. LLC owners are referred to as members, who are regarded separately from the business entity. This means that LLC business owners or investors will not be held personally liable, nor will their personal assets be at risk should the company run into financial distresses such as lawsuits and overdue debt payments. LLC’s provide business owners with similar legal security as a corporation, but still enables the company to function as a small business.
LLC owners are able to determine their executive structures; operational processes and tax treatment, while state laws and regulations determine which types of organisations are permitted to form an LLC, who may be a member of an LLC, as well as the number of members the company may employ. One individual may form a single-member LLC, or multiple individuals may form a multi-member LLC.
The limited liability structure is also recognised as a secure way for investors to occupy shares in publicly listed companies. Shareholders are able to participate in the growth and success of a company, without the risk of personal losses in the case of a failed business.
Forming an LLC
While the requirements differ from state to state, there is a basic structure for forming an LLC. The first step in the process is selecting a name for the organisation. Once a name has been established, an Articles of Organisation must be completed and filed with the Secretary of State.
The Articles of Organisation will establish all rights, powers, duties and liabilities assigned to each member or the sole member of the LLC. Some of the information within the Articles of Organisation includes:
- The personal particulars (such as names and addresses) of the LLC member(s)
- A statement of purpose used to describe the function of the LLC
- The name of a designated individual who will receive any and all legal documents pertaining to the LLC, also known as a registered agent.
Once completed, all documentation must be submitted along with a filing fee dictated by the state. An Employer Identification Number (EIN) must be obtained from the IRS if your LLC intends on having employees. The forms can be obtained on the IRS website, allowing you to get an EIN in a short period of time.
Advantages and disadvantages of LLC’s
One of the key reasons business-owners select the LLC structure for their company is to maintain a limit on personal legal responsibility for themselves, their partners and investors. Ultimately, an LLC is meant to offer business owners with better taxation options, ownership flexibility and limited legal issues.
While LLC’s have a seemingly endless list of benefits, there are several drawbacks to be taken into consideration. The following are some of the pro’s and con’s to consider when making a decision about registering your business as an LLC:
- Limited legal liability for members
- Management flexibility
- Flow-through taxation: All profits are distributed to company members who are then taxed at their personal level, which avoids double taxation such as with corporations.
- Significant privacy
- Flexibility to distribute profits and losses to members at own discretion
- Costs more to form than sole proprietorships and general partnerships
- Transferable ownership is harder to accomplish
- Limited lifespan: While some states allow for a perpetual lifespan, the default for an LLC is to dissolve should an original partner die, leave the company or become bankrupt
- Public trading difficulty: An LLC cannot be publicly traded, but a loophole exists whereby the LLC can be structured as a publicly traded partnership
- May be subjected to additional taxes and fees
What are Limited Liability Companies (LLC’s) used for?
The LLC has 3 main advantages:
Prevents owners from being personally responsible for debts
LLC owners will not be held personally liable for outstanding company debt. Instead, in the case of bankruptcy, the LLC’s assets will be sold and used to pay creditors. Following bankruptcy, all remaining debts are wiped out and the LLC must be formally dissolved.
Allows profits to be passed to owners for tax
The LLC structure allows members to avoid paying double tax through pass-through taxation. This means members are taxed from their personal profits as earned through the company.
Different tax treatments
Flexibility to choose between various tax treatments is a huge selling factor for the LLC structure. LLC members have the freedom to select between the tax systems of sole proprietorships, partnerships, S-Corporations or C-Corporations.
Are Limited Liability Companies Taxed Differently Than Corporations?
Yes. C-corporations are liable to file a corporate tax return and in turn, pay corporate tax on the company’s profit. Should the corporation distribute the profit to shareholders, they are liable to pay personal income tax on those allocations. C-corporations usually end up paying more taxes than S-corporations or LLC’s because profit distributions are taxed at both corporate and personal shareholder levels.
Recap of how to set up an LLC
Choose a name
Ensure that your business has a unique name that does not already exist. You will be notified by the state if the name you’ve selected is suitable. Also consider that in accordance with regulations, the term LLC must appear in the name of your business.
Create and file articles of organisation
The Articles of Organisation are fairly simple to complete and will include basic information required by the state. The document name may vary from state to state and is considered the basic outline for establishing your LLC.
Appoint a registered agent
Assigning a registered agent is another state required step in the process. The selected individual will act as a representative for the LLC and will be responsible for receiving all legal documents. The registered agent is usually the owner or chief member of the LLC.
Payment of required fees
Administration fees for registering an LLC differ from state to state and will be specified upon submission of the necessary documents.
Publish a notice of intent to publish an LLC
Although information is now shared using modern communication, some states still require business owners to publish a notice in local newspapers to announce the intention to form an LLC, or upon establishment of the business. Make sure to check state requirements for publication specifications.
How can an LLC benefit a Startup?
The LLC structure is a top choice for many Startup business owners owing to the clear advantages that come with protection against personal liability, the benefit of flow-through taxation and the freedom of management flexibility. Startup businesses are at more risk of failing than existing entities and funding can often be limited, which is why an LLC structure could be the smarter long-term option. Small-business owners gain the advantage of limited liability offered by some corporation structures, without the added cost and intricacy. The added benefit of an LLC structure within the Startup landscape is having LLC included in the title of the business, giving it a more official and legitimate feel.
When it comes to legal basics, it can seem overwhelming at first. But, it doesn’t have to be. GLS offers a host of free Startup resources to help set you on your way. You can also browse our list of over 200 Legal Templates and Tools, to choose the products your Startup needs at each critical stage of business.
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*The above content does not constitute, nor is it offered as, legal advice of any kind. GLS Solutions Pte Ltd is not a law firm and any support provided pursuant to this entity is not regulated legal advice or legal opinion.