What Is An LLC? A Detailed Analysis Of A Limited Liability Company Structure

what is an llc detailed analysis definition limited liability company pros cons

A Limited Liability Company, more commonly known by its abbreviation ‘LLC’, is a type of legal business identity that allows its owner(s) to have a flexible management structure, while safeguarding their personal assets and limiting their liabilities at the same time. 

For any new business startup, or even an existing setup that is looking to explore their options regarding their business status, choosing the right legal identity is of utmost importance. As far as an LLC is concerned, it comes with its own advantages, processes and highlights that you should be aware of. 

In this read, we will walk you through the various aspects of an LLC. Visit this business blog to learn more about setting up your own LLC? 

LLC - Understanding The Basics 

A Limited Liability Company is a type of business structure where owners are not personally liable for any loans, borrowings or debts, and their personal assets (car, home, bank account) are safe in the event of any lawsuit filed against the company. 

An LLC is a hybrid legal entity, as it gives you quite a flexible combination of a sole proprietorship and a corporation. Limiting personal liability is a highlight of a corporation while the allowance of a pass-through tax mechanism is what we see in partnerships. 

LLCs follow state statutes and these laws might vary from one state to another. The owners of an LLC are referred to as ‘members’ and the company can either be owned by one individual (single-member LLC) or by two or more individuals (multi-member LLC).

 LLC - Who Should Go For It? 

LLCs offer flexibility in the management structure of the business and this is something that new business owners and entrepreneurs usually look for. 

This type of legal structure favors new business start ups since they are not forecasting huge profits or expansion right from the word go. Even in case of initial losses, an LLC is better than other business structures as it offers a more flexible tax system to its members. 

Also, in the event of a lawsuit filed against the business, your personal assets are kept safe as LLCs separate your personal assets and liabilities from business transactions, contracts, agreements, debts, loans, etc. 

The Good Side Of Forming An LLC 

Here are some of the benefits of an LLC: 

Personal Asset Protection

LLCs are known to give a ‘protective wall’ to its members, which means that business assets and your personal assets are legally separated. If the company is sued, creditors can only claim or go after your business assets and that is about it. 

Flow-Through Or Pass-Through Mechanism 

LLCs follow a ‘flow-through’ system that is based on passing on the company’s profits or losses to all the members of the LLC and they add this information to their personal income tax returns. 

This is the reason why owners are not subject to the double-taxation system, a highlight of a corporation. 

Flexibility 

In terms of the overall ownership, management structure and tax mechanisms, LLC can offer a great amount of flexibility to its members. In most of the states, anyone can become a member (individual, foreigner, corporation, etc.) depending on the way it’s operating agreement is prepared. 

Moreover, members can either choose to participate in daily business activities, or appoint managers to run the business operations. These managers can also be or become members of the LLC. 

LLCs have the option to choose their tax mechanism - they can be taxed as a sole proprietorship, partnership or a corporation. If the members go for the C-corp system, taxes will have to be paid according to the corporate tax rate. For the S-corp, the business will be treated as a flow-through entity - business profits will be passed through to the owners and they will be charged according to individual tax rates. 

Less Formalities 

By forming an LLC, the members are relieved of a number of business formalities that might be a requirement in other types of legal entities. You are not formally or legally required to hold regular meetings, maintain extensive records, pay taxes twice (double-taxation), etc. 

Relatively Quick to Set Up 

LLC is a legal business entity that is comparatively quick to set up. If you know all the processes of an LLC formation, you do not even need a lawyer and you can start setting it up right away using the DIY approach. 

Even if you decide to hire a lawyer for your LLC formation, the whole process is still hassle-free as compared to other entity types. 

The Bad Side Of A Limited Liability Company

Although LLCs do not have a lot of negative elements, however, one of the major drawbacks of this type of business entity is that it won’t help you raise much business capital. And it does have its costs without always providing many immediate benefits to pay for itself.

If you are an entrepreneur or a new business owner who is looking to inject some finances into the business right away, LLC might not be the right option for you. Partnerships or corporations are able to bring in more finances since they offer shares or dividends to their stakeholders. 

Forming An LLC - A Quick Overview 

You can form an LLC by following the basic three steps: 

• Select a name for your LLC 
• Submit Articles of Organization with the State 

Once you get the approval from the state, then you can carry on with other steps: 

• Obtain an EIN (Employee Identification Number). It's not that hard to do, you can learn more about it here: How to get an EIN for an LLC.
• Prepare an Operating Agreement 
• File an Annual Report 

The filing fee for mandatory documents might vary from one state to another. 

FAQs On LLCs 

Do I Need Professional Help For LLC Formation? 

There is no legal requirement to hire a lawyer to form an LLC. If you have all the information  you need, you can go ahead and form an LLC yourself. 

What Does Professional LLC Mean? 

Some US states might require you, and the rest of the LLC members, to hold a valid professional license and additionally, form a professional LLC if your business provides services such as attorneys, architects, doctors, engineers, counsellors, etc. 

LLCs offering such professional services are not allowed to register as a regular LLC. 

How Does LLC Formation Vary From One State To Another? 

Apart from the initial cost of forming an LLC, there might be some state-to-state variations in terms of local business permits, licenses, additional local taxes, etc. 

However, it is recommended that the state you choose for your LLC formation should be the state where your business is based in. 

LLC Leverage

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