An LLC, or Limited Liability Company, is a company structure that pieces together aspects of other types of companies. Take components of a sole proprietorship, partnership, and a corporation to get an LLC. The company owners are not personally liable for the company’s debts or other such liabilities. An LLC can be owner by one or more people, who are known as members. Therefore, rather straightforwardly, a single-member LLC is owned by one person. On the other hand, a multi-member LLC is owned by more than one person.
In this type of company, the owners do not have to use their personal assets to cover the company’s debts. Additionally, settlements of any lawsuits the company may face cannot seize company owners’ personal assets. However, for tax purposes, the owners must include the company’s profits and losses on their personal tax returns; the LLC does not pay taxes as itself. It is an option for the LLC to opt to tax itself as a corporation. However, the LLC must adhere to all corporation tax laws and requirements.
The LLC’s profits go directly to the LLC members. Those members then report these earnings or losses on their personal tax returns without paying taxes through the LLC. This process is known an “pass-through taxation”. There are several regulations, filing fees, and legal documents that future owners must complete before forming an LLC. Unlike other types of corporations, LLCs do not have to have officers. They also do not hold annual meetings, or record meeting minutes and resolutions. This adds to the overall simplicity of forming an LLC.
Starting A Limited Liability Company
In many states, in order to start an LLC, all you need to do is file Articles of Organization and pay the filing fee. Some states will even allow you to file these articles by mail or online. Check with your state for all the requirements, however, as some states require additional filings or publishing an statement of intention in a local newspaper.
Legal experts also recommend that you draft an Operating Agreement. An agreement makes it clear how the company will divide any financial assets among members of the LLC. It also dictates how to reach business decisions, and how to handle the onboarding or releasing of members. The Operating Agreement is what allows an LLC to be governed by its own set of rules instead of the standard rules set forth by the state. This Operating Agreement is also important in the case of lawsuits. It demonstrates to the court that your company is indeed an LLC and therefore not subject to the laws that govern sole proprietorships.
Converting To An LLC
If you already have a sole proprietorship or partnership, but you wish to switch to an LLC business model, it is not too late. You can convert to an LLC at any time. Depending on your state there may be some significant paperwork to complete and file. It will not change the tax structure of the company, however you will have to transfer your licenses, tax permits, and employer tax IDs.a