Last Updated on September 6, 2022
Many people are familiar with the terms ‘Corporation’ and ‘Incorporated’. However, not everyone knows that there is another type of business entity known as an LLC (Limited Liability Company). So what exactly is an LLC, how does it differ from a corporation, and why should you consider forming one?
1) Limited Liability
You make the decisions and carry the risk. LLC members (owners) enjoy limited liability, meaning that if you decide to start an LLC, you are not personally liable for the debts of your business. Likewise, should someone successfully sue your business, they may only collect the funds or property that belongs to your company.
2) Flexibility
LLCs are highly customizable and provide members with a great deal of flexibility in structuring ownership interests, allocating profits/losses, and determining distribution of assets upon dissolution.
3) Tax Advantages
LLCs can choose their tax status as either a partnership, sole proprietorship or corporation. Like a sole proprietorship, taxation is pass-through, meaning that all income or losses are passed through to the owners and included on their personal tax returns. If you start an LLC with multiple owners (members), each member’s share of profits/losses can be allocated any way they choose, allowing for different ownership interests.
An LLC can elect to be treated as a corporation for federal tax purposes. An S Corporation is not subject to entity-level taxation and instead passes through its net taxable income or loss to its shareholders, who report their share of the net taxable income or loss on their individual returns. This avoids double taxation on the profits of an LLC, unlike a C Corporation which must pay taxes at the entity level and again on individual tax returns.
4) Simple to Start
LLCs are relatively easy and inexpensive to start. Most states require you to file Articles of Organization with the Secretary of State and pay a small filing fee, usually around $100-$200. The cost will vary depending on your state and the complexity of your business structure. Additionally, you’ll need a company name and address, which you can usually reserve online for around $20-$30.
5) Flexibility of Ownership
If you start an LLC, your business may have one or more owners (known as members). Unlike corporations, LLCs are not required to have a board of directors or similar organizational structure. The default governance rules are based on the percentage of ownership interests, meaning that the percentage of ownership interests determines voting rights and other governance issues. These rules can be changed by drafting an operating agreement (similar to a partnership agreement or corporate bylaws), which members enter into when starting the business.
If starting an LLC seems a bit overwhelming, formation companies such as ZenBusiness help make sure the filing is done right the first time.