Here’s what you need to know about this type of business if you’re considering forming a limited liability company.
What Is a Limited Liability Company?
A limited liability company is one option a business has when it is choosing its legal structure, alongside other options like S corporations and sole proprietorships. The characteristics of the limited liability company include limited liability for the owners’ assets—their liability is limited to their investment in the business. Income from a limited liability company passes through to owners.
Acronym: LLC
How Does a Limited Liability Company Work?
Choosing a business structure is one of the first steps business owners will take as they start a new business. You must choose your business structure and then register that legal structure with your state. You’ll need to do this around the same time you would apply for a tax ID number and any relevant licenses and permits. An LLC is formed in the state in which it operates, by filing Articles of Organization with the state in which you will be doing business. A few states use a Certificate of Organization to form an LLC. If your LLC does business in several states, you will need to set up a separate LLC registration in each state. The first LLC registration (or “main” LLC) is called a domestic LLC, while the other state registrations are called foreign LLCs. Along with the required state formation application, an LLC also should have an operating agreement, which defines the purpose of the LLC, how its members work together, and many other details that describe what happens in certain circumstances.
Ownership
The owners of an LLC are called “members” rather than partners or shareholders. The members draw up an operating agreement, and this guides the way they operate the LLC, similar to a partnership agreement in different types of businesses. An LLC can be owned by individuals, corporations, S corporations, other LLCs, trusts, and pension plans.
Management
An LLC can be managed by a member or by a professional manager. If one of the members is the manager, that person may receive payment as an employee.
Taxation
An LLC is not directly taxed by the Internal Revenue Service. Instead, LLCs are taxed as either a sole proprietorship or a partnership, based on the number of members. in either case, it is the individual owners who are taxed, not the LLC—the income passes through to the owner’s personal income tax return.
If the LLC has one member, it is called a single-member LLC, and it is taxed as a sole proprietorship. If the LLC has more than one member, it is taxed as a partnership. The LLC can also choose to be taxed as a corporation or as an S corporation.
Types of Limited Liability Companies
There are a few different kinds of LLCs. Depending on your situation, it may be helpful to understand these differences.
Basic LLC
The most basic type of LLC is the one that has been described thus far. It limits personal liability, and it can be created for many types of endeavors. However, some types of business endeavors cannot be LLCs. These include banks and insurance companies.
Professional LLC
A Professional LLC (PLLC) is an LLC set up and owned by specific types of professionals. Typically, medical professionals, accountants, engineers, and architects can form a PLLC. The list of professionals eligible for this type of LLC varies by state.
Series LLC
A Series LLC is a type of LLC that has a main LLC and other separate LLCs within it. They are segregated for liability purposes. Series LLCs are often used for real estate holdings—each LLC in the series can own a different property.
