What is a Limited Liability Company?
A limited liability company is a business structure formed with one or more individuals that takes some of the personal liability away from the business owners and helps to establish the business as an entity separate from the business owner(s). It shares traits with a sole proprietorship, partnership and corporation. It may also be referred to as a "Limited Liability Corporation."
How to Setup a Limited Liability Company
Forming an LLC is fairly simple. Different rules and regulations apply depending on the locality where the LLC will operate, and what the business does. Consult your local small business administration to ensure you are in compliance with all local, state, and federal guidelines.
Business Name: The business name is the most important part of an LLC and a business name search should be conducted by a lawyer to ensure it is available.
Required Paperwork: Paperwork to become an LLC should be filed with the state it will operate in. It is strongly advised to use a lawyer to file this paperwork to ensure compliance with all laws.
Business License: Depending on the nature of the business, licenses may be required from more than one agency. These licenses should be acquired before filing to become an LLC.
Tax ID: All businesses will require a tax ID with the IRS to provide to employees and separate the business income from the individual members.
Advantages of a Limited Liability Company
Becoming an LLC affords you the benefits of not being personally liable for everything related to your business, along with the taxation of a small business, saving you hassle of corporate taxes. Corporations are subject to many more regulations and even double taxation. LLC’s are protected from releasing their personal assets to take care of business debt. Profit income is not considered income for the business members, and is not subject to the self-employment tax.
Members of an LLC are compensated with "profit distributions" by writing checks to themselves whenever they need the money (and the business has it) which allows them to have fringe tax benefits.
Disadvantages of a Limited Liability Company
- Members of an LLC cannot pay themselves wages.
- LLC’s are considered partnerships by the IRS for tax purposes.
- There are inconsistencies within state laws as to how LLC’s are operated meaning LLC’s operating in more than one state may run into some issues.
- LLC’s with one person cannot choose to be a partnership for tax purposes and must file taxes as a sole proprietor.
Photo Credit: MorgueFile
This post is part of the series: Forming Your Business Structure
- Forming Your Business: Choosing Your Business Structure
- Sole Proprietorships: The Simplest Business Structure
- Forming Your Business: Is a Business Partnership Right for You?
- Setting Up a Limited Liability Company
- What is an S Corp?