This is the third blog post in our series on Types of Business Entities. In it, we'll be discussing the advantages and disadvantages of Limited Liability Companies (LLCs).
"A limited liability company (LLC) is a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.
The "owners" of an LLC are referred to as "members." Depending on the state, the members can consist of a single individual (one owner), two or more individuals, corporations or other LLCs."
LLCs can have multiple members and exist and be taxed similar to a partnership with some corporation-like proponents. LLCs can also exist as single member LLCs which are similar to sole proprietorships. Furthermore, LLCs can file an S-corporation election, which will enable them to be taxed as an S-corporation while remaining a limited liability company.
In our first blog post of this series, we mentioned that there are certain areas to consider when deciding on the best structure for a business. In this post we'll take a look at these areas again and discuss the advantages and disadvantages of limited liability companies.
Areas to Consider:
Since LLCs can operate similarly to other entity types, each of these areas may vary depending on the LLC.
- Establishing a Business Name:
- Determine that no other LLC currently exists within your state with your desired business name.
- Include "LLC" in your desired name
- Don't include any restricted words in the name such as "bank" or "insurance".
- Business registration:
- File the Articles of Organization
- Create an Operating Agreement
- Acquire the appropriate license(s) or permit(s) and register with the local government.
- Check with your state to determine if you're required to publish a statement in your local paper about your LLC's formation.
- Ongoing Administration: LLCs are not required to prepare annual minutes like corporations.
LLCs are taxed differently depending on the number of members. LLCs may also request S-corporation status, in which case they're taxed like an S-corporation regardless of the number of members.
Single member LLCs are taxed like sole proprietorships. While LLCs with multiple members are taxed like partnerships. Members of LLCs are considered self-employed and as such are required to pay self-employment tax contributions towards medicare and social security on the entire net income, unless an S-corporation election is made.
Single member LLCs:
- Able to report any income earned through their personal tax return.
- Don't require separate business return.
- Have the same requirements as partnerships.
- Requires a balance sheet.
- Have the same requirements as s-corporations
- Requires a balance sheet.
- Have full control over business decisions.
- More flexible, capable of making split second decisions.
- Reduced managerial efforts.
- Members must agree on management processes, etc.
- Developing an operational agreement is a necessity.
- Members have two options for funding. They can use their own assets or take out debt.
- May split investment between members or take out debt.
- Owners of LLCs are called "members."
- LLCs can have any number of members.
- Setting up LLCs require more effort and cost than sole proprietorships and many cases partnerships.
- However, LLCs are considered easier and less costly to set up than corporations and s-corporations.
- Flexible tax options, with profit and loss reported on members' returns.
- Level of control, documentation, and funding options are dependent on the number of members and whether or not the LLC is filing as an s-corp.
- Members' personal assets are LESS vulnerable to the risks involved in their company.
Stay tuned for our next blog post of this series where we will be discussing the advantages and disadvantages of corporations.