What is LLC? & 7 types of Limited Liability Company (LLC)
May 27, 2022
What is LLC?, 7 types of Limited Liability Company, and Advantages of LLC (Limited Liability Company)
Choosing the appropriate legal structure is an important aspect of running a company. It is critical to understand your alternatives, whether you are just starting out or your company is expanding. In this article information on What is LLC?, the types of Limited Liability Company, Which LLC is right for me?, and What does LLC do for Me is explained in detail.
Table of Content
A Limited Liability Company (LLC) is a business form in the United States that combines the personal liability protection of a corporation with the tax efficiency of a sole proprietorship or partnership. Before I go into the many scenarios and LLC kinds that may be most beneficial, let’s take a look at the most common LLC versions available to business owners.
What is LLC (Limited Liability Company)?
An LLC is a legal entity formed by legislation and governed by the laws of the state in which it operates. The business form combines a sole proprietorship or partnership’s pass-through taxation with a corporation’s restricted liability. For most business owners, this is an excellent position.
Although each state has its own set of restrictions for LLCs, the legal framework is identical. A member of an LLC is the owner, and LLCs can have one or more members. Forming an LLC allows you to keep your personal and business assets separate, produces far less paperwork than a typical corporation, and gives you more freedom in designing your organization to your needs.
Some LLCs are created for professionals like doctors and lawyers, while others are created to take advantage of interstate commerce rules. Smart business owners prefer LLCs to corporations because they have personal liability protection without having to deal with the red tape, paperwork, or formalities that can be challenging for a small business, a startup, or a solo entrepreneur.
Advantages of LLC (Limited Liability Company)
- Personal Liability Insurance – Personal liability is protected by forming a Limited Liability Company (LLC). This means that if your company is sued or fails on a loan, your assets (house, vehicle, and bank account) are safeguarded.
- Potential for expansion – Because they provide tax benefits, and personal liability protection, LLCs can increase in risk and profit.
- Consumer Trust and Credibility – In general, banks and consumers trust LLCs more than informal business arrangements such as sole proprietorships. This can destroy a company’s ability to borrow money and its marketability.
- Tax advantages – Limited Liability Companies (LLCs) have the ability to tailor their tax structure.
7 types of Limited Liability Company (LLC)
- Limited or General Partnership
A family limited partnership is identical to a limited partnership, except that it is owned by family members. Families typically form an LLC as a limited or general partnership and invest their assets in it. They can also delegate power and membership to other relatives, giving them entire authority over their assets.
- Sole Proprietorship or Single Member LLC
A single-member LLC, as the name implies, has only one owner. In the same way as a sole proprietorship does, the owner is directly liable for:
Transactions within the company
Taxes that the company owes.
If a single-member LLC opts not to form a corporation, it is treated as a “disregarded entity” and taxed as a sole proprietorship. LLCs can be taxed as corporations as well.
Know More: Differences between Sole Proprietorship and LLC
The most common file type and the most cost-effective LLC formation is the single-member LLC. There is also a huge reduction in the amount of paperwork necessary.
- Professional Limited Liability Company (PLLC)
A professional Limited Liability Company varies from a conventional LLC in that it can only be registered by professional licence holders (physicians, attorneys, accountants, and so on). A PLLC can decide to be regarded as an S Corporation for tax purposes, just like a conventional LLC. Which can help its members reduce their self-employment tax burden.
- General Partnership
A general partnership is a preferable structure for forming an LLC with several members. This means that all owners are responsible for the company’s transactions, obligations, and taxes. Each member can also decide when assets are sold, and he or she handles paying taxes on his or her share of the business income.
A Limited Liability Company (LLC) is beneficial to a small or medium-sized business. The fact that numerous people share obligations is the same in both general and limited partnerships. However, one significant distinction is that a single member handles the entire liability. This also leaves one person with the least amount of risk.
- Manager-Manged or Member-Managed LLC
You must set up your chosen structure in the operating agreement when founding an LLC. This allows you to choose between a member-managed LLC and a manager-managed LLC (Limited Liability Company).
The simplest structure is a member-managed LLC, which is run by the company’s owners. Every business owner has the power to act on behalf of the company.
When there are passive members of the LLC, such as investors, a manager-managed Limited Liability Company is used.
- Series LLC (Limited Liability Company)
Series LLCs are business entities that have a parent (umbrella) LLC and other LLCs (“series”) beneath it with their own liabilities, debts, and rights (available in some states but not all). Individual series in a series LLC are usually taxed separately.
- Foreign and Domestic LLC
Foreign LLC: If an LLC is registered as a domestic LLC in one state but does business in another (physical presence or economic nexus), it must file as a foreign LLC in the other state (s).
Domestic LLC: When an LLC’s formation paperwork (Articles of Organization) is registered in a state, it becomes a domestic LLC there. The company’s domicile is in that state (known as a home state).
Things to keep in mind, While selecting a type of an LLC (Limited Liability Company)
- Owners must decide if they want to be actively involved in day-to-day business decisions and operations or choose to be more “hands-off.”
- If they want to be involved in the day-to-day operations of the company, they will probably go with member-managed LLC.
- They may choose to be manager-managed LLC if they would rather appoint one member or employ someone else to handle day-to-day business obligations.
- When a business owner forms an LLC in one state and wants to expand into another, they can do so by “foreign qualifying” in the new state.
- The process of obtaining approval to conduct business in the state where they seek to expand their activities under their existing corporation is known as foreign qualifying.
- If a corporation has a physical presence or economic tie in the state, foreign qualification is required (reaching a certain income threshold in a state).
- In the state where the formation paperwork is filed, a brand new LLC that does not exist anywhere else is referred to as a Domestic LLC.
The LLC establishes the state as its home state by filing Articles of Organization.
FAQs on Limited Liability Company (LLC)
1. Which LLC is right for Me?
The best option for a firm maybe determined by the nature of commercial activity, industry, number of owners, and even the professional credentials of the owners. Keep in mind that selecting a business entity type necessitates taking into account administrative needs as well as legal and tax implications. When deciding on whether LLC or other business structure will best benefit them, entrepreneurs should seek the advice of their accountant, attorney, or tax advisor.
2. What does LLC do for Me?
An LLC protects you from personal liability for the activities of your co-owners or employees if you have business partners or employees. An LLC provides you with a framework for running your company, including making decisions, splitting earnings and losses, and dealing with new or departing shareholders. A Limited Liability Company (LLC) provides tax benefits.
3. Is this my first time forming a Limited Liability Company (LLC)?
In the state where the formation paperwork is filed, a brand new LLC that does not exist anywhere else is referred to as a domestic LLC. The LLC establishes the state as its home state by filing Articles of Organization.
4. What are the tax advantages of forming an LLC?
An LLC can have “pass-through” tax treatment, which means it only pays one level of tax and avoids the double taxation that C corporation face. Only the LLC’s owners are taxed (unless a different tax election is made), and the LLC itself is not taxed. This is comparable to how S corporations are taxed.
You may quickly register a Limited Liability Company (LLC) online. To find out what is required of you when organizing your LLC, go to the Secretary of State’s website in the state where you wish to register. Prepare yourself for the data you will need to enter into the Articles of Organization. Along with filing this paperwork, you’ll have to pay a relevant fee.
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