Limited Liability Company

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How Does a Limited Liability Company Work (LLC)?

Limited liability companies (LLCs) are business structures in the U.S. that shield their owners from personal responsibility for their debts and liabilities. A limited liability company combines the characteristics of a corporation with those of a partnership or sole proprietorship.

Although LLCs have limited liability features similar to corporations, flow-through taxation is a feature of partnerships rather than LLCs.

 

What is a Limited Liability Company (LLC)?

State statutes permit limited liability companies, and regulations governing them vary from state to state. Members of an LLC are generally referred to as owners.

There is no restriction on ownership in many states, so anyone can join, including individuals, corporations, foreigners, foreign entities, and even other LLCs. However, some entities, such as banks and insurance companies, cannot form LLCs.

LLCs are formal business arrangements requiring articles of organization to be filed with the state. In addition to providing a greater level of flexibility and protection for its investors, LLCs are easier to set up than corporations.

It is possible for LLCs to elect not to pay federal taxes directly. The owners report their profits and losses on their personal tax returns. In case fraud is detected or a company fails to comply with its legal and reporting requirements, creditors can go after the members.2 LLCs may choose a different classification, such as a corporation.

An LLC’s formation

In general, LLCs have some common requirements, although they vary from state to state. The first thing owners or members need to do is choose a name.

Afterwards, the articles of organization can be documented and filed with the state. These articles outline the rights, powers, duties, responsibilities, liabilities, and other obligations of each LLC member. Documents include the LLC’s members’ names and addresses, registered agent’s name, and purpose of the business.

The state fee is paid directly to the state along with the articles of organization. Federal paperwork and fees are also required to obtain an employer identification number (EIN).

What LLCs have to offer and what they don’t

Businesses register as LLCs primarily to limit their own and their partners’ or investors’ personal liability. According to some, an LLC is an amalgam of a partnership, which is a straightforward business agreement between two or more owners, and a corporation, which has certain liability protections.

While LLCs have some advantages, they also have some disadvantages. Upon the death or bankruptcy of a member, an LLC may have to be dissolved according to state law. It is possible for a corporation to exist in perpetuity.

Comparison of LLCs and partnerships

Unlike a partnership, an LLC separates the business assets of the company from the owners’ personal assets, protecting them from the LLC’s debts and liabilities.

It is possible for LLCs and partnerships to pass through profits, along with their tax responsibilities, to their owners.2 Their losses can be used to offset other income but only up to the amount invested. Form 1065 must be filed if the LLC has been organized as a partnership. The Form 1120 must be filed by members who have elected to be treated as a corporation.

A business continuation agreement ensures the smooth transfer of interests when an LLC owner leaves or dies. It is mandatory for the remaining partners to dissolve the LLC and create a new one without such an agreement in place.

L.L.C. – What Is It?

LLCs are a type of business structure commonly used in the United States. An LLC is a hybrid structure that combines the features of both a corporation and a partnership. A LLC, like a corporation, provides its owners with limited liability if the business fails. LLCs, however, pass-through their profits to the owners, so they are taxed as personal income.

How Do Limited Liability Companies (LLCs) Work?

There are two main advantages to forming an LLC:

  • As a result, its owners are not personally liable for the company’s debts. The personal assets of its owner-investors cannot be pursued if the company goes bankrupt or is sued.
  • Profits can be passed directly to owners and taxed as personal income.
  •  In this way, the company and its owners are not subjected to “double taxation.”
  • LLC Examples: What Are They?

  • There are more LLCs than most people realize. Google’s parent company Alphabet is an LLC, as is PepsiCo Inc., Exxon Mobil Corp., and Johnson & Johnson.6
  • Many smaller LLCs exist. Sole proprietorship LLCs, family LLCs, and member-managed LLCs are all variations of LLCs.
  • LLCs are commonly used by physicians’ groups. As a result, doctors are protected from personal liability for medical malpractice awards.

What is the tax treatment of limited liability companies versus corporations?

Yes, of course. Profits from corporations are taxed first at the corporate level and then again once they are distributed to shareholders. Business owners and investors decry this “double taxation”.

The profits of limited liability companies are passed directly to the investors so that they are taxed only once, as part of their personal income.

Putting it all together

For the formation of a business, limited liability companies (LLCs) are important legal structures. Businesses with limited liability keep their assets and debts separate from their owners’ personal assets and debts. The creditors of a bankrupt company cannot seize the owners’ personal assets, only those of the company. In addition, LLCs offer several benefits, such as simplified taxation and a relatively straightforward formation process. LLCs are the most common type of business in the United States because of this reason.

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