Limited Liability Company (LLC)

Definition: A Limited Liability Company (LLC) is a form of organization popular in the United States. It incorporates the mixed traits of a sole proprietorship, partnership and corporation along with releasing the owner’s assets from business debts and liabilities.

An LLC operates according to the regulations of the State in which it is located. Every state has its norms for Limited Liability Companies.

Content: Limited Liability Company (LLC)

LLC Characteristics

A Limited Liability Company is considered to be a suitable business structure in the United States. It can be easily distinguished from a corporation, on the basis of its following features:

LLC Characteristics
  • Limited Liability Protection: The members of an LLC are not held accountable for the company’s liabilities and operations.
  • Separate Legal Entity: An LLC is a legal corporate body which is solely responsible for its actions or misdeeds.
  • Filing Articles of Organization: It is essential to get your LLC officially listed with the State by filing the Articles of Organization.
  • Pass-Through Taxation: In an LLC, the profit or loss of the business is passed on to the members’ income. Simultaneously, the taxes are also charged on their income.
  • Owners as Members: The business owners are termed as members in case of an LLC.
  • Limited Record-Keeping: An LLC need not maintain pervasive records, basic accounting and bookkeeping are enough.
  • Residency Not Required: For owning an LLC, the members don’t need to have a U.S. citizenship.
  • Managed by Member or Manager: An LLC can plan its operational strategy by either handing over the management responsibility to a member or else, hiring a manager.

LLC Example

The Lycra Company LLC is a leading textile manufacturing brand situated in Wilmington, DE, United States. It is a domestic LLC being the registered office of the company which operates worldwide.

Similarly, the branch of this company i.e., The Lycra Company LLC is located at Texas, which is a foreign LLC.

Types of LLCs

There are different forms of LLCs categorized in terms of membership, location, management and State regulations and relaxation.

Let us introduce you with each of these LLC types, one by one below:

Types of LLCs
  1. Professional LLC: Such an LLC provides professional service such as consultancy, legal, medical or chartered accountancy.
  2. Series LLC: A series LLC can be understood as many child LLCs running under a single parent LLC.
  3. Domestic LLC: When the LLC operates in its State of origin, it is considered as a domestic LLC.
  4. Foreign LLC: The LLC operating in a new State other than its State of origin, is termed as a foreign LLC.
  5. Single-Member LLC: As obvious by its name, this type of LLC is owned by a single member, similar to a sole proprietorship.
  6. Multiple-Member LLC: Like partnership and corporation, such an LLC have more that one owner or member.
  7. Member-Managed LLC: When the owners decide to carry out the management activities themselves, it becomes a member-managed LLC.
  8. Manager-Managed LLC: An LLC where a management expert or a manager is hired for leading the business operations, is called as a manager-managed LLC.
  9. Anonymous LLC: Only applicable in Mexico, the state doesn’t disclose such an LLC’s ownership details to the general public.
  10. Restricted LLC: Popular in Nevada, in a restricted LLC, the members are not entitled to business distributions up to ten years from the date of its formation.
  11. L3C: A low-profit limited liability company is a socially beneficial business entity. It is an amalgamated form of profit-making and non-profit organization.

Formation of an LLC

Many new entrants feel that forming an LLC is a strenuous task. We bring to you a detailed and systematic way to go about while constituting a limited liability company:

Formation of an LLC
  1. The primary step is to ensure the state where you are looking forward to opening the business, i.e., the operational location.
  2. Next, provide an identity to your organization by naming it.
  3. Secure your LLC name by filling a simple form along with the fee, it is advisable if you are not immediately registering your LLC.
  4. The LLC needs to submit the name of a statutory agent who is authorized to accept and send legal papers and summons on its behalf.
  5. An Articles of Organization also termed as Certificate of Formation is to be filed with the State.
  6. Be clear about your LLC’s management strategy; whether to be handled by the manager or member.
  7. Now, an operating agreement is formed which acts as the foundation of LLC operations. It specifies member roles, voting rights, management principles, capital structure, profit distribution, etc.
  8. Get an exclusive identity for your LLC by acquiring an Employer Identification Number (EIN).
  9. Next is to file your LLC’s annual report with the State by paying off the filing fee.
  10. If you are planning to expand your business in other States, it’s essential to get your LLC registered in that particular State.

Advantages of an LLC

A limited liability company possess most of the benefits of sole proprietorship or partnership. Also, it is a positive strategy to keep apart the personal liability from business liability.

Following are the significant benefits of establishing an LLC:

Advantages of an LLC
  • Limits Personal Liability: The debts and the liabilities of an cannot be claimed over the personal assets of an LLC member or owner.
  • Legal Protection: Due to limited liability, the members of an LLC are legally secured since they are only liable to the extent of their capital investment.
  • Membership Flexibility: An LLC has no limit on the number of members and can be started by anyone, an individual, corporation, trust or partnership.
  • Taxation Benefits: In an LLC, the tax is levied on the personal income of the owners, drawn as profit or loss from the business.
  • Improves Credibility: The business can procure a higher level of trust from the partners, associates, vendors and creditors if it is an LLC.
  • Encourages Informal Structure: Unlike the companies, LLCs doesn’t have to incorporate a formal structure. Also, there is no need for having the Board of Directors.
  • Reduces Documentation Burden: In an LLC, the manager or member do not have to maintain extensive records or bulky paperwork.
  • Simplicity: Forming and operating an LLC is quite convenient when compared to a corporation.

Disadvantages of an LLC

Although being a hybrid business structure, the idea of setting up a limited liability company is exposed to various limitations, as given below:

Disadvantages of an LLC
  • Difficult to Transfer Ownership: In an LLC, it’s mandatory that all the members mutually agree to add a new member, transfer the ownership or change the ownership percentage.
  • Termination of LLC: An LLC ceases to exist if any of its members are deceased or leaves the organization due to any other reason.
  • Maintaining Proper Records: It is essential to systematically maintain business records to avoid any fraud practices.
  • High Cost: The various charges associated with the LLC including, franchise tax fee, name reservation fee, annual report filing fee, initial formation fee, etc, makes it an expensive idea.
  • Self-Employment Tax: Some States levy self-employment tax on the members. Another major drawback is that the taxes are collected from the members, on or before the due date, even if profit distribution is delayed.
  • Vague Management Structure: The informal organizational structure sometimes lead to role ambiguity and misunderstandings which may adversely affect the LLC’s reputation.

Conclusion

A Limited Liability Company is a suitable option for the entrepreneurs who look forward to establishing a secured entity like a corporation; along with the ease of management as in sole proprietorship or partnership business.

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