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Businesses can have varied structures, ranging from Sole Proprietorships to Corporations. Limited liability companies (LLCs) are among the most popular structures for small businesses owing to their tax benefits and ease of operation.
Additionally, they’re quite easy to form, as compared to corporations. That’s why many new entrepreneurs prefer this business structure for their startups. In fact, the mega-store, Walmart started off as a family LLC.
If you’re planning to start a small business, you should know about LLCs. Here’s everything you need to know:
What are LLCs?
LLCs are hybrids between large-scale corporations and general partnerships. They imbibe the best of both structures. LLC owners have limited personal liability as the company is considered a separate entity. They’re not responsible for the obligations and debts that their LLCs incur. At the same time, they can have multiple owners, like partnership firms.
Ownership
There are single-member and multi-member LLCs. LLC owners are called “members” and they can be individuals, corporations, other LLCs, or foreign entities.
Formation
LLCs are formed when the owners file articles of organization in the Secretary of State’s office. The articles should include details such as the names of the members and the location of the LLC. The cost of formation differs from state to state.
Taxation
LLCs are pass-through entities. This means that the income generated from the LLC is passed through to the members. Therefore, members don’t need to pay double taxes. This tax-saving benefit of LLCs is one of the things startups should keep in mind when deciding on their business structure.
However, this isn’t the case with multi-member LLCs. They need to pay self-employment tax. To avoid this, you can start an LLC that is taxed as an S-Corp. The members here are seen as employees of the business and earn a W-2. However, the LLC taxed as an S-Corp does need to pay corporate taxes.
Merits
- LLC owners get the advantage of limited personal liability. They are not legally responsible for business liabilities.
- You don’t need to maintain formal records of meetings. This makes it easier to run LLCs.
- LLCs have flexible ownership and management. They can have any number and type of owners. They also don’t need to have a formal board of directors that meet annually.
Demerits
- LLCs don’t enjoy the longevity of corporations. They get dissolved when a member dies.
- It is difficult to go public if you run an LLC.
- LLCs have more requirements than sole proprietorships or partnerships.
Wrapping Up
While LLCs are more complex than sole proprietorships, they offer you the best of Corporations and Partnerships. To learn more about LLCs, take a look at this detailed infographic created by GovDocFiling.
