Business Entity: What Is an LLC?

December 18, 2020
Business woman cutting tape at grand opening. What is an LLC?

What is an LLC? 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 they can offer a lot of benefits, 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 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: 

  • Allows you to form as a single member
  • Has no maximum number of members
  • Has the flexibility to file and pay taxes as other business entity types

What are the Benefits?

Forming an LLC has several benefits, which include: 

  • A choice between manager-managed or member-managed
  • Limited liability
  • Fewer paperwork requirements 
  • Flexible profit and loss allocation
  • Tax status flexibility

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 that 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 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 partnership, meaning that 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. Remaining members can start a new LLC, but those members will pay a fee to terminate. 

Members must pay a self-employment tax if you file taxes as a 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: 

  • Articles of Organization (to submit to your Secretary of State)
  • Business name (that is both available and unique)
  • Licenses and permits (which will vary by industry and state)
  • Newspaper notice (not a requirement in all states) 
  • Operating Agreement 
  • A registered agent (to receive legal documents) 
  • Tax registrations

How to Convert to an LLC

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

  • A C-Corp
  • An S-Corp
  • A sole-proprietorship

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

  • File Articles of Organization (required in most states) 
  • File an Operating Agreement (contact your state’s Secretary of State)
  • Dissolve the C-Corp: 
    • File and write the C-Corp’s Articles of Dissolution 
  • Transfer assets

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

  • File necessary paperwork 
    • The exact paperwork and requirements will vary by state. 
      • Some states may want you to send paperwork to the Secretary of State before converting your business. 
      • Other states may require your LLC to merge with the S-Corp and name your LLC as the surviving company. 
  • Liquidate assets for S-Corp and return them to shareholders.
    • After LLC receives state recognition, the S-Corp shareholders will contribute to LLC’s assets. 

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

  • Check availability of proposed name 
  • File Articles of Organization (required in most states) 
  • File an Operating Agreement 
  • Obtain an Employer Identification Number 
  • Transfer assets 

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 all have their own 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 LLCs offer 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 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! 

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.