Why Should You Register a Limited Liability Company?
A Limited Liability Company (LLC) is a formal business structure that is the simplest to form and maintain. Creating an LLC offers some of the same benefits as a corporation, without the costs and compliance complexity. Business owners who are looking for personal liability protection, tax flexibility, and management options may find that registering an LLC will be an ideal choice for their company.
Four Advantages of an LLC Business Structure
Simplicity
Next to operating a business as a Sole Proprietor or Partnership, Limited Liability Companies are the least complex and costly form of business to start and maintain from a state compliance perspective. The business registration paperwork to register an LLC is minimal as are the ongoing filing requirements.
Personal Liability Protection
Because an LLC is considered a separate legal entity from its members, its financial and legal responsibilities are also its own. So, if someone sues the business or the company cannot pay its debts, the LLC members are typically not held responsible. Therefore, their personal assets are at a lower risk of being seized to pay legal damages or settle debt than they would be if the business were a Sole Proprietorship or Partnership.
Tax Treatment Options
By default, a Limited Liability Company is considered a “disregarded entity” for tax purposes. As such, income tax is applied in the same way as it is to Sole Proprietorships and Partnerships. Business income and losses are passed through to its members’ tax returns and are subject to members’ individual tax rates. An LLC has other tax treatment options, too. Members can opt for an LLC to be taxed as a corporation, with profits taxed at its corporate rate. Or members of an LLC can choose S Corporation election, which allows for the LLC to have pass-through taxation but with the corporate benefit of a reduced self-employment tax burden because members only pay Social Security and Medicare taxes on their income taken as salaries; members’ dividend income is not subject to self-employment taxes.
Management Flexibility
An LLC may be either member-managed or manager-managed. In a member-managed LLC, the owners handle the day-to-day management of the business. In a manager-managed LLC, members appoint one or more managers to manage the company. In most states, an LLC can appoint members of the LLC to be managers, or it can hire someone else to do the job. The managers of an LLC usually have the authority to make certain decisions and run the day-to-day operations of the company while members retain authority over more significant strategic matters. Most states consider an LLC to be member-managed unless the formation paperwork indicates it should be manager-managed.
Types of LLCs
There are multiple types of Limited Liability Companies available. Before you set up your Limited Liability Company, it is best to consider your needs and then compare these requirements to the available LLC options. Below is a list of available LLC options, however, not all states recognize all types of LLCs, so entrepreneurs must review their state’s options.
- Single Member LLC – If a company will have just one owner or a married couple as the owner, it is considered a single-member LLC.
- Multi-Member LLC – If an LLC will have more than one member, it is considered a multi-member LLC.
- Member Managed LLC – When owners run the day-in, day-out operations of the business, the LLC is member-managed. Most LLCs use this structure.
- Manager-Managed LLC – When LLC members want to appoint a manager (who could be someone that the company hires or one of the members) to handle daily operations, the LLC is manager-managed.
- Domestic LLC – When an LLC has registered its formation documents (Articles of Organization) in a state, it goes on record as a domestic LLC there. That state is the company’s domicile (a.k.a. home state).
- Foreign LLC – If an LLC is registered as a domestic LLC in one state and is conducting business in another state (physical presence or economic Nexus), it must usually file as a foreign LLC in the additional state(s). Learn more about the foreign qualification process.
- PLLC – A Professional Limited Liability Company (PLLC) differs from the standard LLC in that only professional license holders (physician, attorney, accountant, etc.) may register the company. Like a regular LLC, a PLLC may elect to be treated as an S Corporation for tax purposes. Which can help minimize the self-employment tax burden on its members.
- Series LLC – Series LLCs are business entities (available in some states but not all) that have a parent (umbrella) LLC and other LLCs (series) beneath it with their own debts, obligations, and rights. Usually, individual series in the series LLC are taxed separately.