Business Entity: What Is an LLC?

What is an LLC? Is an LLC a business entity? A Limited Liability Company can be a great way to grow a small business. It offers limited liability, something that can be helpful to its members.

While this type of business organization can offer a lot of benefits, like limited liability protection, there are some drawbacks you’ll want to know about. Here’s what you should know, how to form one, and more information. 

What is an LLC?

An LLC is a business entity type that offers owners, called members, limited liability. The qualifications are very broad: corporations, foreign entities, individuals, and other LLCs can join a Limited Liability Company. 

It is important to note that an LLC can have an unlimited number of members. It is also possible to have a single-member LLC as well. 

Do You Need One?

You may need a Limited Liability Company if you want to form a business entity that: 

What are the Benefits?

Forming an LLC has several benefits, which include: 

LLCs can operate as either a manager-run or member-run company. In manager-managed LLCs, members select managers to operate the business. These managers will conduct work for the company.   

In member-managed LLCs, owners will have a role in daily operations.  All members share limited liability, meaning they aren't personally liable if the company experiences legal trouble. 

Another benefit is the paperwork requirements. While other business entities require annual reports, board of director meetings, and state requirements, LLCs don't have as many required forms of upkeep. 

Fourth, profits and losses can be split in several ways. Members will agree to the terms of profits and losses in the Operating Agreement. 

LLCs also have greater flexibility when it comes to tax status. They can experience taxation as a general partnership, meaning members will complete a Schedule K-1 to report profits and losses. 

What are the Disadvantages?

Even though there are several benefits, there are also disadvantages. 

In many states, if a member leaves an LLC, it must dissolve. The remaining members can start a new multi-member LLC, but those members will pay a termination fee. 

Members must pay a self-employment tax if they file taxes as a general partnership. These members will be considered self-employed. As a result, these members will pay a self-employment tax. 

How to Start an LLC

If you want to start an LLC, there are a few things that you'll need: 

How to Convert to an LLC

You can convert your business entity to a Limited Liability Company if your business is: 

First, you can convert your C-Corp by doing the following: 

Another option you can consider is converting your S-Corporation to an LLC. To do this, you'll: 

A third option you can consider is converting your sole proprietorship. You'll do this by: 

Differences between LLC, S-Corp, C-Corp, and Partnerships

If you want to form an LLC, you may want to know how it compares to other business entities. S-Corps, C-Corps, and partnerships have distinct advantages; learn more about how they stack up.

C-Corps

C-Corps and LLCs differ in important ways. First, C-Corps experience double taxation. 

This means that taxation occurs once when the corporation's income experiences taxation and again when members, called shareholders, experience taxation again on individual income. 

LLCs don't pay income taxes, but the members pay self-employment taxes. C-Corps experience double taxation, but shareholders don't pay self-employment taxes.

Partnerships

While LLCs and partnerships may seem similar, there are some crucial differences. LLCs operate under an operating agreement that defines members' percentages of ownership. Members will pay tax individually after profits are passed to its members.

Partners in a partnership share profits and losses of the business according to the percentage of their share. Partners will complete a partnership agreement before forming their partnership. 

While a domestic LLC offers limited liability to all members, partners in partnerships have personal liability.

S-Corps

Finally, while an LLC has few member requirements, an S-Corp is different. An S-Corp must have a board of directors and corporate officers, two things not required with an S-Corp. 

Second, S-Corps have a limit of 100 shareholders. An LLC has no limit to the number of people who can join.

Another difference is how long the business entities can exist. LLCs dissolve after their member or LLC owner leaves the company. S-Corps will continue if its shareholders leave the corporation.

Seek Professional Entity Formation Advice

Forming your new business is an important milestone. Work with the pros at 1-800Accountant today for your entity formation and small business needs. Our professional advisers can offer guidance and support on your small business ownership journey!