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How to Structure a Business

  1. S Corporation
  2. Sole Proprietorship
  3. Nevada Corporation
  4. Corporation
  5. Pass-Through Entity
  6. LLC
  7. Limited Partnership
  8. Private Company
  9. Not For Profit

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What Is an LLC (Limited Liability Company)? Definition

Updated: November 23, 2022

An LLC is a business entity that provides limited liability protection to its owners. LLCs are popular among small businesses because they offer flexibility and simplicity. The owners of an LLC are called members. LLCs can be formed in all 50 states and the District of Columbia.

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    KEY TAKEAWAYS

    • A limited liability company (LLC) is a type of business structure. It can provide additional protection to owners if they get personally sued or the business has to repay debts and liabilities. 
    • Each state has its own regulations surrounding LLCs.
    • Any individual or entity is eligible to become a member of an LLC, as long as it is not an insurance company or a bank. 
    • Profits and losses of LLCs are passed through to their members who then have to report the information when they file their individual tax returns.

    What Is An LLC?

    An LLC, or limited liability company, is a type of business structure that offers limited personal liability protection to its owners. LLCs are popular among small business owners because they provide many of the benefits of a corporation, such as limited liability protection and the ability to raise capital. They can do this, as well, without some of the drawbacks, such as complex paperwork and formalities. 

    An LLC is created when it files articles of organization with the state in which it plans to do business. Like a corporation, an LLC has perpetual existence. This means it remains in existence even if its owners die or leave the business. An LLC also has flexibility in how it can be taxed. It can choose to be taxed as a sole proprietorship, partnership, or corporation

    The biggest advantage of an LLC is that its owners are not personally liable for the debts and liabilities of the business. This means that if the LLC goes into debt or is sued, the owner’s personal assets, such as their homes or cars, are safe from seizure. 

    Personal liability protection is one of the main reasons why LLCs are so popular among small business owners. Another advantage of an LLC is that it can help you raise capital for your business. Because an LLC is a separate legal entity from its owners, it can enter into contracts and borrow money in its own name. 

    This can be a helpful way to finance your business without putting your personal assets at risk. If you’re thinking about starting a small business, an LLC might be the right choice for you. It offers significant personal liability protection and can help you raise capital for your business. Talk to an attorney or accountant to learn more about whether an LLC is right for you.

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    How to Form An LLC

    To form an LLC, you must file articles of organization with your state’s LLC office. These articles include:

    • The name of the LLC
    • Address
    • The names of its members

    You must also draft an operating agreement, which details the roles and responsibilities of each member, as well as the rules for running the LLC. 

    Once you have filed your articles of organization and drafted your operating agreement, you can start doing business. You will need to obtain any licenses or permits required by your state or local government, and open a business bank account in your LLC’s name. 

    If you are thinking about starting a business, an LLC is a great option to consider. It is important to consult with an attorney or accountant to make sure that an LLC is the right structure for your business.

    What Are the Benefits of An LLC?

    LLCs are flexible in terms of how they can be structured and governed. There are a number of benefits that come with operating an LLC. First, they offer their owners limited liability protection. 

    This means that if the business is sued or incurs debt, the owner’s personal assets are protected. This is a major advantage over sole proprietorships and partnerships, which offer no such protection. 

    Second, LLCs are relatively easy to set up and maintain. Unlike corporations, which have complex formation and governance requirements, LLCs can be formed relatively quickly and easily. 

    LLCs can choose to be taxed as either corporations or partnerships. This flexibility allows businesses to minimize their tax liability. Limited liability protection, ease of formation, flexibility, and tax advantages make LLCs an attractive option for small businesses and entrepreneurs.

    What Are the Drawbacks of An LLC?

    While an LLC has many advantages, there are some potential drawbacks to consider before forming one. 

    One drawback is that it may be more expensive to set up and maintain than a sole proprietorship or partnership. This is because it’s a more complex business structure and requires compliance with additional regulations. 

    Another potential drawback of an LLC is that it may be more difficult to obtain financing from traditional lenders. This is because lenders often view LLCs as higher-risk investments. As a result, you may need to put up more collateral or pay higher interest rates if you are looking for additional financing. 

    Lastly, while an LLC offers personal liability protection, this protection may be limited in certain situations. For example, if you personally guarantee a loan, you may still be held liable for the loan if the LLC defaults. 

    Overall, an LLC can be a great way to protect your personal assets and gain flexibility with taxes and management. However, there are some potential drawbacks to consider before forming one.

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    What Is the Difference Between An LLC and a Corporation?

    Most people are familiar with the term corporation. An LLC, or limited liability company, is a business structure that provides limited personal liability to its owners. Like a corporation, an LLC is a separate legal entity from its owners. 

    LLCs are governed by state law, so the rules vary from state to state. The biggest difference between an LLC and a corporation is that an LLC is not a separate tax entity from its owner, while a corporation is. 

    This means that the profits and losses of an LLC “pass through” to the owner’s personal tax return, while a corporation’s profits and losses are taxed separately from the owner’s personal taxes. Another difference between an LLC and a corporation is that an LLC can have just one owner, while a corporation must have at least two owners.

    In some states, LLCs can elect to be taxed as if they were corporations. One reason this happens is when the owner wants to avoid the hassle of double taxation. 

    Another reason might be that the owner wants the flexibility of only having to file one tax return. Or, it might be that the owner wants the flexibility of having more than one owner without having to jump through all the hoops required by corporations.

    Example of An LLC

    LLCs are much more common than one might think. Google’s parent firm, Alphabet, as well as PepsiCo Inc., Exxon Mobil Corp., and Johnson & Johnson are all LLCs. There are a lot of smaller LLCs as well. Among the variations are member-managed LLCs, family LLCs, and single proprietorship LLCs. 

    Many medical groups have LLC registrations, which helps lower the risk of personal culpability for medical malpractice awards for individual doctors.

    Summary 

    Limited liability companies (LLCs) are specific types of business structures. One of the major benefits of forming an LLC is that it provides you with personal protection when it comes to the responsibility of the debts and liabilities of the business. 

    LLCs have similar characteristics to a corporation, a partnership, and a sole proprietorship. However, they do operate differently. Having the ability to flow-through taxation in an LLC is also a specific feature of a partnership. The array of benefits that an LLC can provide might make it the perfect business structure for you. 

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    FAQS About LLCs

    How Much Does It Cost to Set Up An LLC?

    The cost of setting up an LLC can depend on the state you’re located in, but the costs can range anywhere from $40 all the way up to $500. 

    How Are LLCs Taxed?

    LLCs are considered pass-through entities when it comes to federal income tax. This means that the LLC doesn’t pay tax on its business income. The members of the LLC take on the taxes of the LLC.

    What Can An LLC Write Off?

    There are several types of expenses an LLC can write off. These include business insurance, self-employment tax, startup business expenses, advertisements, depreciation, and office supplies and services. 

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