One popular way for investors to structure their holdings is by forming a limited liability company (LLC). They’ve also started to take the place of the formerly popular limited partnership.
The great thing about forming an LLC is that it allows for flexibility. From 500 corporations that have subsidiaries to families that pool their money together, there are a lot of ways that people can take advantage of the benefits of a limited liability company.
In this guide to LLCs, we will go over what LLCs are, why people form them, and some things that you should consider before you start one. So keep on reading and we will take you through everything you will want to know.
How do Limited Liability Companies Work?
A limited liability company is a kind of business arrangement or structure that allows for a lot of flexibility when it comes to profits, taxation, and ownership.
As the name implies, this structure limits how much personal liability the members of the company will be responsible for when it comes to the company’s debts.
It’s fairly easy and simple to start an LLC. The member or members will need to come up with a name for the company and then file articles of organization with their state of choice, for a small fee.
When you file your LLC in the state that you live in, you will also have the option to file a Nevada LLC or Delaware LLC. Limited liability companies that are formed in these states might be able to take advantage of benefits such as more anonymity and fewer taxes.
Benefits of Using a Limited Liability Company
An LLC is a special legal structure. It combines the benefits of a partnership and a corporation. Let’s go over some of these advantages and benefits below.
Choose your Tax Status
When you form an LLC, you have the ability to pick whether the company is taxed as a corporation or not. That is to say, you are able to decide to have the company pay taxes on its earnings as a regular stock corporation would. Or, you can choose to have it prepare K-1 statements for each investor that shows their portion of the losses and profits.
The investors will then declare these profits and losses on their personal income tax filings.
Can be Manager-Run or Member-Run
LLCs have members instead of shareholders. Your LLC can be either managed by a manager or by the members.
With a limited liability company that is managed by members, all owners get a say in the decisions of the company. With the other kind of LLC, the members pick managers who will run the business.
The managers will handle the daily tasks, usually for wages and salary.
Flexible Loss and Profit Allocation
Losses and profits can be virtually divided in any way that is compatible with tax law. This is different from a corporation, where everything needs to be divided proportionally.
If you or your family created an LLC to start a business, you could write the contract that governs the business to meet your needs, regardless of how complex it is. This contract is known as the operating agreement.
Limited Liability for All Investors
In a limited partnership, the general partners, or managers, have personal liability for the company’s liabilities and debts. In a limited liability company, on the other hand, no one is personally on the hook, unless they agree to be liable in a contract.
One example would be a commercial bank loan where you need a personal guarantee from an owner who has more than twenty percent ownership of the LLC.
Important Things to Consider
It is important to point out that you need to keep very careful records when you are part of a limited liability company. You will need to separate your own personal finances from the finances of the company.
This might require a separate bank account. You also might need to pay a yearly tax. For example, in Delaware, the yearly tax is around $300 each year.
You might also be liable for self-employment taxes with a limited liability company. If you decided to be taxed as a corporation, then you wouldn’t need to pay those taxes.
Also, limited liability companies are not permanent. Depending on your operating agreement and the state you live in, a limited liability company might need to be dissolved if a member leaves or passes away. You might be able to get through this issue with the operating agreement.
You might also want to check out the legal structure that is known as a Limited Liability Limited Partnership, otherwise known as an LLLP. This is a little different from an LLC and it has some of the characteristics of a limited partnership, but with limited liability, as well.
You should also consider getting a registered agent to help you with the whole process. Read more now to see if you should hire a registered agent.
The Importance of Using this Beginner’s Guide to LLCs
Hopefully, after reading the above guide to LLCs, you now have a better understanding of what LLCs are and how they work. As we can see, an LLC can be a great way for you to start a company while limiting your liabilities.