What is an LLC?

An LLC is a limited liability company, which is a type of legal entity that can be used when forming a business. An LLC offers a more formal business structure than a sole proprietorship or partnership. It also offers protection to the owner from personal liability for any of the debts that a business incurs. In other words, the personal assets of the owner can not be used for legal claims against the business. LLCs are common because they provide the liability that’s similar to a corporation, but they are easier to establish.

While LLCs and S corporations two terms are often discussed side-by-side, they actually refer to different aspects of a business. An LLC is a type of business entity, while an S corporation is a tax classification. It lets the Internal Revenue Service (IRS) know that your business should be taxed as a partnership. To become an S-corporation, your business first must register as a C corporation or an LLC. A business must meet specific guidelines by the Internal Revenue Service (IRS) in order to qualify as an S corporation.

An S corporation provides limited liability protection but also offers corporations with 100 shareholders or fewer to be taxed as a partnership. An S corporation is also known as an S subchapter. In some instances, a business may be both an LLC and an S-corporation. (You can form an LLC and choose to be taxed as an S corporation, but your business can also operate under the default taxation system for LLCs.)

The business structure that you choose can significantly impact some important issues in your business life. These issues include exposure to liability and at what rate and manner you and your business are taxed. It can also impact your financing and your ability to grow the business, the number of shareholders the business has, and the general manner in which the business is operated.

Both LLCs and S corporations surged to the forefront around the time of the Small Business Job Protection Act of 1996, which contained a number of changes to basic corporate tax law, such as enabling S corporations to hold any percentage of stock in C corporations.1 C corporations, however, are not allowed to own stock in S corporations.

Here are some key facts about LLCs (Limited Liability Companies):

1. Limited Liability: One of the primary advantages of an LLC is that it provides limited liability protection to its owners (members). This means that members are typically not personally responsible for the debts and liabilities of the company beyond their investment.
2. Pass-Through Taxation: LLCs are generally treated as pass-through entities for tax purposes. This means that the profits and losses of the LLC pass through to the members’ personal tax returns, and the LLC itself does not pay federal income taxes at the entity level.
3. Flexibility in Management: LLCs offer flexibility in how they are managed. They can be managed by all members (member-managed) or appoint managers who may or may not be members (manager-managed).
4. Formation and Maintenance: Forming an LLC involves filing articles of organization with the state and paying a filing fee. Some states also require an operating agreement, which outlines the management structure and operating procedures of the LLC.
5. Ownership: LLCs can have one or more owners, known as members. Members can be individuals, corporations, other LLCs, or foreign entities, depending on state laws.
6. Duration: An LLC can have a perpetual existence or a specific duration as specified in its articles of organization or operating agreement.
7. Transferability of Ownership: Ownership interests in an LLC can often be transferred, but this transferability can be restricted by the operating agreement or state law.
8. Compliance: LLCs must comply with state regulations regarding annual filings, fees, and other requirements to maintain good standing.
9. Legal Entity: An LLC is a separate legal entity from its owners, which means it can enter into contracts, own assets, incur debts, and sue or be sued in its own name.
10. State-Specific Regulations: Regulations governing LLCs can vary from state to state, so it’s essential to understand the specific requirements in the state where the LLC is formed and operates.

Understanding these key facts can help entrepreneurs and business owners determine whether forming an LLC is the right choice for their business structure and goals.

Benefits

• An LLC is a limited liability company, which is a type of legal entity that can be used when forming a business.
• An LLC offers a more formal business structure than a sole proprietorship or partnership.
• While LLCs and S corporations two terms are often discussed side-by-side, they actually refer to different aspects of a business.
• An LLC is a type of business entity, while an S corporation is a tax classification.
• An S corporation election lets the Internal Revenue Service (IRS) know that your business should be taxed as a partnership.
• To become an S-corporation, your business first must register as a C corporation or an LLC and meet specific guidelines by the Internal Revenue Service (IRS) in order to qualify.