If you’re considering forming an LLC, you’ve probably got questions. Fortunately, we’ve got answers. We’ve helped thousands of people form an LLC, so you could say we’re kind of experts on the subject.
Here are some of the questions we get the most.
What Exactly is an LLC?
An LLC — or Limited Liability Company — is a legal entity that shares similarities with both corporations and partnerships in that it combines the limited liability features of a corporation with the flexibility and tax benefits of a partnership.
What are the Benefits of Forming an LLC?
I’m glad you asked! There are many:
- Protection of Personal Assets – Owners of an LLC enjoy limited liability, which protects their personal assets from judgments and other obligations of the entity. If the LLC incurs debts or liabilities, only your business’ assets are at risk. So your house, car, boat, whatever, will never be taken to pay for business debt.
- Fewer Formalities Required – With an LLC, there are fewer hoops to jump through each year, like those regular meetings of a board of directors and an annual meeting of shareholders required by an S or C-Corporation. They do, however, require you to file your Articles of Organization with the Secretary of State to be formed, and the members of the LLC are required to enter into an Operating Agreement that governs how the LLC will be operated.
- Pass-Through Tax Treatment – This is probably the benefit small business owners like best: LLCs are treated as “pass through” entities under the Internal Revenue Code unless the members elect to have it taxed like a corporation. This means that the owners report profits and losses only on their own personal income tax forms, and no separate entity level filing is required.
- Flexible Allocation of Profits and Losses – You can allocate profits and losses among you and other members of your LLC in any way you wish; you don’t even have to allocate them in proportion to ownership interest. This allows for more flexibility in separating ownership interest from distribution of profits from ongoing operations, which may be useful, for example, in businesses where some owners are actively involved in day-to-day activities while others are not. It also provides significant flexibility in tax planning for its members. Who wouldn’t want that?
Are There Different Types of LLCs?
- Single Member LLC vs Multiple Member LLC – As you probably can guess, a single member LLC is a business structure that has a single owner. If you have more than one member, you’d go with the Multiple Member LLC.
- Member Managed LLC vs Manager-Managed LLC – A member-managed LLC is run by the owners of the company. This is the usual structure. Another structure is the manager-managed type, which, as the name implies, has a separate manager who handles daily operations.
- Domestic LLC vs Foreign LLC – Domestic and foreign in this context refers to the state where you form your LLC. A company registered as an LLC in Michigan and that does business in Michigan is operating as a domestic LLC. If the same company is doing business in Texas (a physical presence), it is operating as a foreign LLC in the other state.
- LLC vs PLLC – A PLLC is a professional limited liability company. They differ from regular LLCs in that only a license holder (doctor, lawyer, others) may register the company, and there may be limitations on ownership.
Got more questions about forming an LLC? Please download our Free LLC Guide, which is chock full of useful information for any small business owner considering an LLC as a business structure.