A limited liability corporation, or LLC, is a hybrid form of legal business structure. Owners, called “members,” are provided limited liability, which means debtors can only sue for company assets, and not each member’s personal assets. Depending on the state, an LLC may contain one or multiple members. Taxes in an LLC are passed through to each member to be reported individually instead of being taxed as a separate entity.
LLC vs. Corporation
Taxes
As previously stated, an LLC’s members are taxed individually. In a corporation, there is “double taxation,” which means the corporate entity itself is taxed first, and then the dividends given out to shareholders are taxed as well. This makes an LLC attractive to someone who isn’t interested in going public since only corporations have the option to do so.
One little note about taxes is that LLC members are considered self-employed and must pay a self-employment tax that goes towards Medicare and Social Security.
Start-up Costs and Recordkeeping
An LLC has smaller start-up costs and less recordkeeping. On the other hand, a corporation has significantly higher start-up costs, and there are strict deadlines for releasing financial statements. Start-up costs for any type of business are going to vary by state, locality, and industry.
Limited Life
One disadvantage an LLC has is limited life. A corporation can run forever if the CEO leaves, but if one member of an LLC leaves, the business is dissolved. All remaining obligations must be fulfilled by the members, and then they must decide whether they are going to take separate paths or form a new LLC.
Reduced Opportunity for Investment
Another disadvantage that comes with LLCs is the reduced ability to obtain venture capital. Venture capitalists like to invest in corporations because the corporations are allowed to go public, which allows for unlimited growth. Therefore, an LLC would have a hard time getting a very large cash injection.
Requirements for Setting up an LLC
Choose a Business Name
When choosing a business name, there are a few things to consider:
- Must not have same name as another LLC in your state.
- Must have an indication that the company is an LLC. Things such as “LLC” or “Limited Company” would be acceptable.
- Must not include words restricted by your state.
File Articles of Organization
This document is filed with the Secretary of State in most states. The document establishes your LLC and asks for simple information about the business and members.
Create an Operating Agreement
This agreement will establish things such as percentage of interest, profit/loss allocations, and general member rights and responsibilities. It is not required but is highly recommended.
Get Required Licenses and Permits
Licenses and permits will vary depending on state, locality, and industry.
The LLC is a very popular form of business for those who don’t plan on going public or becoming an extremely large company. The LLC would be the perfect type of structure for a small business due to the low start-up costs, flexibility, and minimal recordkeeping.
