Corporation, sole proprietor, and partnership are terms that you’ve most likely heard before and understand the concept behind. But what is an LLC?
LLC stands for “limited liability company” and it combines aspects of corporations, partnerships, and sole proprietorships. It has become a very popular business model for small, new businesses. The LLC model works because it is similar to the way a corporation operates, yet the model is more straightforward and adjustable.
An LLC combines the limited liability of a corporation with the pass-through taxation of a sole proprietorship, which is very appealing to many small business owners. This combination means that the business is its own legal entity and separates debts, yet you can still tie them to your own personal taxes. You can either be the sole member of an LLC or you can have multiple members, like with a partnership.
If it sounds too good to be true, it might be. Though the LLC is a coveted business structure, there are certain businesses that are more well-suited to its model than others. Read on to learn about some pros and cons of the LLC.
- No ownership regulations: If you’re starting a business from overseas, there are no restrictions to citizenship or residency. Also, if you want to have corporate entities as a part of your LLC as members, you can. However, if the corporation is the only member of the LLC, the LLC will be treated as a partnership for tax purposes.
- Liability Protection: The members of an LLC are separate from the LLC entity itself, so any debts that the LLC incurs, the members will not be liable for. The only personal assets that are at risk with an LLC are those invested in the company by the personal members of the LLC.
- Adjustable Profit Distribution: In a corporation, the percentage amount that is invested is the percentage amount in profit that is returned to each individual shareholder. In an LLC, the members choose how the profits of the LLC are distributed to each member. This can be differentiated by ownership percentage instead of an exact percentage share.
- Pass Through Taxation: An LLC will not usually pay its own taxes, instead, the income would be passed through the personal income of each member of the LLC and would be taxed as personal income. In this way, the LLC is very similar to a sole proprietorship or partnership.
- Adaptable Tax Status: An LLC is usually treated as a partnership or sole proprietorship during tax season, but the members of the LLC always have the option to treat the LLC as a C- or S-corporation for taxes.
- Few Compliance Requirements: While a corporation is required to keep up a strict schedule of shareholder meetings, bylaws, and corporate resolutions, the LLC does not have to do any of that. Instead, the members of the LLC adhere to an “operating agreement.” Members can still call meetings whenever they want and can document meetings and resolutions, but they are not required by law to do so.
- Personal VS Public: As the owner or member of an LLC, you need to be able to separate your business and personal finances. This will require you to open separate bank accounts and keep track of different cards and spending. There are other things to think about as well, such as cashing checks in the name of the LLC and the fees that come along with the business accounts.
- A Member’s Departure: If a member of your LLC departs the business, then your LLC immediately ceases to exist. Unlike a corporation where shareholders can come and go, the LLC members must be in for a permanent partnership.
- Taxes: Pass through taxation can be a benefit or it can be a hindrance. Sometimes the personal income of the LLC member will have higher taxes than a company, and you will still be paying for personal tax items such as Medicare and Social Security.
If you are interested in flexible business management and taxes, then an LLC might be the best choice for your business. Even those with partnerships, sole proprietorship, or corporations may benefit from a change to an LLC. However, it is important to plan over any change with a corporate financial advisor to examine the personal pros and cons. Also, it is important to note that some companies cannot file as LLCs. These companies include insurance agencies and banks.