Limited Liability Company definition
Each of the readers with a high degree of probability has already come across the term “limited liability company” or seen its abbreviation, LLC. This type of organization is common both in the US and around the world, because it will protect business owners from personal liability for some of the company’s problems (for example, business obligations or the payment of certain debts).
That is, thinking about what LLC means, you should first of all perceive it as a protective barrier for the business owner! If we analyze in more detail what is an LLC business, then this can be explained as a certain commercial structure created for profit — partners combine their efforts, work together and share the income that remains after paying all costs and taxes.
Also, experts often notice that the concept of Limited Liabilities Companies is a bit like a corporation (excluding pass-through taxation).
What is the meaning of LLC?
So, what does LLC mean in business? As a rule, if the organization works successfully and efficiently, then it makes a profit, and the owners of the shares get some dividends. However, there are also opposite situations when the company operates inefficiently and expenses exceed income or borrowed funds are attracted and liabilities accumulate for which there is nothing to pay. As a result, partnership agreements may not be implemented, tax debt is growing.
If an LLC falls victim to such circumstances, then the members are unlikely to be required to meet the organization’s obligations and pay its debts. And finally, the shareholders cannot lose more than they have invested in the business.
How to form an LLC?
At the moment, the USA is in the top ten countries with the best conditions for doing business, which is why opening an LLC in the local market is quite a promising undertaking. Registration requirements tend to differ from state to state, because the scope is regulated in accordance with the regulations of a particular state, and not the country as a whole. It is also worth remembering that in addition to uniform federal taxes, local taxation in different states also differs.
However, there are several key steps that are common in starting a company in all states:
- creating a unique and appropriate name for the company;
- creation of the charter of the company and its documentation;
- submission of the charter to the regulatory body.
The charter performs the essential function of establishing the rights and obligations, responsibilities and powers of all parties to the LLC, and also includes the names of registered agents. The fee for processing the statute of the regulators is paid to the state treasury.
LLC: advantages and disadvantages
Of course, before starting a business, you should carefully study all the pros and cons of an LLC. For example, the undeniable advantages include:
- the possibility of combining the efforts of several businessmen if their own forces and resources for doing business are not enough;
- the risks of each LLC participant are limited by its contribution to the charter capital.
On the other hand, there are also some disadvantages of LLC. Namely, dissolution in case of death or bankruptcy of one of the participants (however, the organization itself will continue to exist). The second important disadvantage is the impossibility of opening a public company, which would be based on the structure of an LLC.
Partnership Vs Limited Liability Company
The distinction between these two types of organizations is quite clear. In the case of a partnership, the owners are required to be personally liable for the debt of the company or its obligations. But when opening an LLC, there is protection against such exorbitant costs.
LLC vs. Partnership
There are certain differences between LLCs and partnerships. The main difference is that an LLC can be owned by just one person. Partnerships, on the other hand, need two members.
LLCs have unlimited lifespans, which will continue through generations even after the owner dies. Partnerships end when one of the partners sells their share or dies.
Partnerships are simpler in terms of documentation. The individuals are not required to file any paperwork or get any documents from the government. They just decide to work together.
On the other hand, LLCs need a certificate of formation to function. They must also be registered with the state they operate in.
Last but not least, in partnerships, the owner can be held responsible for business debt. Assets such as homes or personal vehicles may be used to pay the debt. With an LLC, the owner receives liability protection, making their personal assets untouchable.
What Are Some Examples of LLCs?
LLCs can take on many forms. Some common types of LLC examples include cafes, restaurants, bars, contractors, builders, and more. People offering professional services such as accounting can also start an LLC.
Some common LLC—type companies are eBay, Pepsi-Cola, Blackberry, and IBM. Many of today’s famous corporations started as LLCs before deciding to expand into C-Corp.
Examples of LLCs
People usually do not think about the type of responsibility of each well-known brand or company, but in fact there are a lot of them around.
Prominent examples of large business LLCs include Johnson & Johnson, Exxon Mobil Corp, PepsiCo Inc, and Alphabet, as well as Google’s parent company.
There is also a fairly large number of medium and small LLC-type organizations managed by private individuals.
Are corporations taxed differently than Limited Liability Companies?
Of course, the taxation is different. LL companies provide income directly to their owners and only need to be taxed once as personal earnings. And corporation’s income is taxed first at the corporate level and then as the investor’s personal income.