Office Captain TeamThe Limited Liability Company or simply LLC, is a type of ownership that comes with a lot of flexibility and benefits of a corporation as well as partnerships at the same time avoiding several of their drawbacks. It had gained popularity and became one of the best choices over the past few years because of its simplicity in structure as well as the limited liability that acts as a shield to the personal assets of the business owner.
Limited Liability Company is neither a corporation nor a partnership and is considered as a hybrid of both. However, you can submit a form to the IRS if you wish to treat the LLC as a corporation.
Advantages that drive to form a Limited Liability Company
Limited Liability
One of the main advantages of the LLC is the limited liability. Just like the corporations, the LLC’s also have the advantage of limited liability, which can protect your personal assets.
Choice of Taxation
The members (owners) of the LLC have an option to choose how they can be taxed like a sole proprietor(if owned by a single person) or a partnership or even as a Corporation.
If they choose the partnership or the sole proprietorship model, then there won’t be any double taxation and can report their profits on personal returns.
The members also have a choice to opt for the taxation model like that of a corporation, where there is double taxation. Selecting this option is a great choice in case if there are any benefits or advantages that can balance the double taxation.
Flexibility in Operation and Management
LLC’s provide greater flexibility and management when compared to incorporation as they don’t need to record and maintain the minutes, file written resolution, or hold annual board meetings. Also, the requirements of reporting are also fewer when compared to corporations, which saves much time.
Ownership Flexibility
They also have the flexibility in selecting the owners and do not have restrictions like that of S Corporation. The owner can be and person, a partnership firm, or a Corporation. There are no restrictions on the number of owners an LLC can have. Even the owners can be a foreign investor or a corporation.
Limitations and Disadvantages
Complex Formation Process
Forming a limited liability company is relatively complex than a sole proprietorship or a partnership. The formation process of this ownership can include filing documents like articles of organization.
You may also require the help of an attorney and an accountant while the formation process and the whole process is also quite expensive.
No Stock’s
As there is no stock involved in the LLC. This type of business ownership may not be an appropriate one for the owner who wishes to sell his shares by making an initial public offering.
Incentives and Taxation
Unlike the corporation, if you want to give any incentives to the employees, this business type may not be an appropriate one as the costs of those benefits provided by incentives are not tax deductible.
Also, LLC’s can’t deduct the cost of the benefits for the members who own more than 2% in the business.
Life Span Issues
While forming an LLC, one needs to mention the dates of dissolution in the articles of organization. In case of the death of the owner, LLC can dissolve automatically. However, it can be reconstituted once again as per the rules and regulations as per the member’s wish.
Forming an LLC
Forming an LLC is just similar to forming a Corporation
While forming an LLC, one needs to fill certain forms like, the articles of organization which is similar to the articles of incorporation that’s filled while forming and Corporation and the other is operating agreement, which is like the Corporation’s bylaws. Sometimes you may also require a notice of intent for operating as an LLC.
Also, the formation process includes paying the filing fee, usually in the region where you operate your business.
The articles of organization usually contain details like LLC name, details, address, how the LLC is going to managed, effective dates, its duration, and also several other similar details. While the operating agreement contains details about how the LLC will be operated, details of the members, rules, and responsibilities, members’ rights and others.
Be known that the filing documents, rules can differ between the states.
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