The inclusion of the letters “LLC” in the name of a company is a public declaration that the company is a type of corporation operating as a legal entity, separated from its owners. Because of this critically important separation, the company’s owners cannot be held personally liable for actions or exclusions relating to the company’s performance and services. In other words, the personal assets of the owners – such as residences and bank accounts – are protected from the reach of business creditors.
LLC Defined
The letters in the abbreviation LLC stand for Limited Liability Corporation, and identify the company as a specific type of incorporated business. While there are numerous ways to incorporate a business, an LLC is especially appealing to businesses that desire to incorporate.
An inherent benefit of all corporations and LLCs is that they shield their shareholders from personal liability arising from business debts and business lawsuits, according to the Wall Street Journal. An LLC is seen as a particularly beneficial status for individuals running small businesses. This is because an LLC affords the same legal protection granted to other types of corporations while at the same time creating for the business owner(s) increased tax benefits.
Any time an LLC corporation uses or displays its name, it must include the letters “LLC,” indicating that the business is to be recognized as its own legal entity. This means that the company must include “LLC” on every form of paperwork, such as business cards, checks, legal documents, invoices and advertisements, just to list a few.
In order for a company to be incorporated as an LLC, it must meet specific legal standards designated by each state’s office of the Secretary of State. Therefore when researching the requirements for incorporation as an LLC, a business owner will need to follow the laws for his or her specific state.
How to Become an LLC
As many states allow businesses owned by solo-operating individuals to become LLCs, the numbers of companies enjoying this status tend to be smaller than those businesses found operating under other types of corporate statuses. As an LLC, the company is required by state law to file annual reports with the Secretary of State’s office for the state in which the LLC incorporated. Each state has specific regulations with which all LLCs must consistently comply throughout their operation.
As an LLC, business owners who have incorporated as such are afforded the same legal protection as the owners of any other type of corporation. One benefit for the LLC is that its owners cannot be held personally liable for actions directed at or taken by the company. Although C-corporations are taxed twice, individually and at the corporate level, the LLC’s profits are only taxed one time.
How an LLC Works
In most states, individuals who are not citizens of the United States are granted the right to own shares in an LLC. Owners of any LLC have very specific requirements that must be followed in order to discontinue their interest portion of the business, and these requirements mandate more stringent restrictions than those existing for other types of corporations. A person with shares in an LLC may need to obtain the written consent from every other member of an LLC in order to sell, and there may be restrictions on exactly who may purchase the seller’s membership.
Some C-corporations that meet specific requirements can choose to file as an S-corporation, thus allowing the shareholders to receive profits that are not taxed at the corporate level, but rather at the individual level, according to Entrepreneur. A major advantage of the LLC has to do with granting less stringent ownership requirements. LLCs are allowed to issue a variety of classes of stock while an S-corporation is only allowed to issue one kind.
In an S-corporation, the number of shareholders must be 100 or fewer, and non-resident aliens are prohibited from owning shares in the company. Additionally, S-corporation shareholders cannot be in other corporations, LLCs or partnerships, while an LLC imposes no such limitations on ownership.
LLC Management
LLCs are allowed the advantage of flexibility when it comes to management, meaning it can be managed by members or shareholders, or the owners can agree to designate a manager for the business.
While every state allows for corporations to have a single shareholder, there are a few states that require LLCs to have more than one member. Until the mid-1970s, companies had to choose between forming either a corporation or a partnership, and both were fraught with serious disadvantages.
Partnerships offer very little legal protection from company debts and lawsuits, although they are only taxed once. On the other hand, corporations endure double taxation because the tax code applies to net profits and capital gains while offering the benefit of preferable legal protection to its members. Essentially, LLCs combine the best features of corporations and partnerships.
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Good article. If you manage your LLC well you can protect yourself from most liability except in cases of gross negligence.
Managing an LLC or other corporate entity well includes: having insurance; separate accounts, accounting, and spending; avoiding the intermingling of personal and company funds; and so on.
You do get some tax benefits of an LLC, but there’s a downside, such as getting the pleasure of paying both sides of FICA.
Mostly the LLC is used, at least in cases of sole-proprietorships, for legal/liability purposes and not tax purposes.
This is why I always read the comments. Thanks for these additional tips!
If the LLC takes out a property loan, the bank makes the owners sign a personal liability clause that allows the bank to come after personal property if you default on the LLC loan. At least in Alabama, I know from experience.