Limited Liability Company LLC Definition, Advantages, & Disadvantages

If you are unsure of what What Does Llc Mean type is best for you, review our Types of Business Comparison Table and/or try our Incorporation Wizard. If you still have questions, consult an attorney or accountant. An S corporation is an Internal Revenue Service tax classification, not a type of business entity. An LLC may choose to be taxed as an S corp or as a default LLC. Read ourWhat Is the Difference Between an LLC and an S Corparticle for more information. LLCs can be taxed as sole proprietorships, partnerships, C corporations or S corporations.

But not all LLCs qualify for S Corp. taxation–they must meet IRS requirements. S corporations may not specially allocate profits, losses and other tax items under US tax law. A limited liability company is a business structure in the U.S. that protects its owners from personal responsibility for its debts or liabilities. Limited liability companies are hybrid entities that combine the characteristics of a corporation with those of a partnership or sole proprietorship. This benefit is shared by limited liability companies, sole proprietorships, and S corporations. However, the latter two business structures do not have the limited liability protection as described above.

LLCs Have Decreased Liability

State https://intuit-payroll.org/ usually doesn’t allow you to form a new business with the same name as an existing one. When you form an LLC, you gain the exclusive right to use your name as a business entity name in your state, and you also create a public record of your use of the name. The LLC moniker at the end of a company’s name can also lend credibility to a small business. In some states, individuals involved in certain types of professional practices are not allowed to form regular LLCs. These are LLCs specially designed for licensed professionals like lawyers, doctors, architects, engineers, accountants, and chiropractors. The main difference between professional and regular LLCs is that all the members of a professional LLC must hold a professional license. Unlike with a corporation, it is not necessary to have officers and directors, board or shareholder meetings, or the other administrative burdens that come with having a corporation.

An S corp meets IRS rules to be taxed under Chapter 1, Subchapter S of the Internal Revenue Code. Most states do not require you to be specific about the purpose of your LLC. Instead, a statement such as “The purpose of the Limited Liability Company is to engage in any lawful activity for which a Limited Liability Company may be organized in this state” is usually sufficient. The answer to this question largely depends on your specific business and personal circumstances. You need to decide a few things to get everything set up properly. People often don’t realize whether or not they should include their LLC in the business name itself. In other words, incorporating as an LLC communicates to the world that a business is legitimate and well-established.

How to pay yourself in an LLC

C corporations are separate taxpaying entities with their own low 21% tax rate. S corporations are pass-through entities—profits pass through the business and are taxed at the shareholders’ individual rates. Once registered, a limited liability company is required to add the letters LCC to its business name. The limited liability company is known in some other countries as a private limited company. This article is about the United States of America-specific business entity form. For privately-held limited liability companies in general, see Private limited company. For limited liability companies in general, see Limited company.

Compared to a sole proprietorship or partnership, the main disadvantage of a limited liability company is the expense and paperwork of setting up the business and filing annual reports. There are also potential administrative hassles in keeping a separate bank account and running payroll. If you plan to solicit outside investment, you may find that investors prefer corporations over LLCs. An LLC’s simple and adaptable business structure is perfect for many small businesses.

How to form an LLC

S corps require filing with the IRS under special criteria and are limited to 100 maximum shareholders. With limited partnerships, only one partner’s assets are protected from business-related debts. When one’s business is under a sole proprietorship, assets and liabilities for the business and the individual are blended, creating liability issues. Post a projecton ContractsCounsel today to get connected with corporate lawyerswho are well-versed in the area of LLC formation and management for the best possible results.

LLCs can have one or multiple managers, it is entirely up to the description of the owner. There are even some LLCs that have specific members managing the company and other silent partners sharing in the profits. Limited liability companies, on the other hand, allow the profits to be passed directly to the investors so that they are taxed only once, as part of the investors’ personal income. Both LLCs and partnerships are allowed to pass through their profits, along with the responsibility for paying the taxes on them, to their owners. While the limited liability feature is similar to that of a corporation, the availability of flow-through taxation to the members of an LLC is a feature of a partnership rather than an LLC. This corporate structure personally protects owners from company liabilities. Limited liability companies are designed to be flexible in their ownership, taxation, and management.

One benefit of the structure for corporations is that it allows companies to raise capital by selling stock, which is a power limited liability companies do not have. Alternatively, an LLC will protect your personal assets from any business-related losses.

This choice allows members of an LLC to minimize their tax burden. LLCs ordinarily provide their owners with pass-through taxation. The profits the business incurs pass through the business to the owner’s personal tax return. Corporate shareholders who work for the corporation must be treated like employees of the corporation. For tax purposes, corporations can be C corporations or S corporations.

An EIN is a number that is used by the US Internal Revenue Service to identify and tax businesses. Visit our EIN guide for instructions for getting your free EIN. At some point, inspiration struck you to go into business for yourself.

In other words, rather than paying yourself a salary, you can withdraw cash straight from the company’s account, which is much more convenient. The LLC formation and incorporation filing fees vary by state. An LLC may be managed by its members or by selected managers. If the LLC is to be managed by its members, it operates much like a partnership. Each member has an equal say in the company decision-making process.