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All About LLCs: The Top 7 Things You Need to Know

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LLCs

Limited Liability Companies or LLCs have become the legal structure of choice for businesses across the US since they first emerged in 1976.

As a hybrid between general partnerships and corporations, LLCs offer business owners the best of both worlds, making them attractive choices for those looking for a suitable business legal structure.

However, despite its popularity, it can still be challenging for some to understand the details of this legal structure, especially when it comes to its benefits and differences from other business legal entities.

With that said, to help you better understand what exactly LLCs are, this article listed down the top 7 things you need to know about them. If you’re ready, check them out below.

1. Limited Liability

As its name suggests, limited liability companies or LLCs were designed to help legally limit how responsible a business owner is for their company’s potential liabilities, including accumulated debts and potential losses.

With LLCs, business owners don’t have to worry about the company’s debts becoming personal debts since incorporating their company as an LLC means it’s now a separate legal entity from the owner.

So, even if your company suffers from failure or defaults on loans, you don’t have to worry about it affecting your personal assets and causing financial ruin. In contrast, these are often real concerns for smaller business legal structures like sole proprietorships and general partnerships.

2. Ease of Operation and Formation

Another advantage of LLC is that it offers business owners the same benefits as larger corporations, like S-Corporations and C-Corporations, but without the high operational costs and stringent requirements.

In fact, LLCs allow business owners like you to enjoy the flexibility of smaller structures along with the benefits of larger ones. Moreover, forming an LLC these days has been made easier with online incorporation services, so you don’t have to worry about the nitty-gritty of creating one from scratch.

With that said, the general idea behind LLCs is to offer business owners additional room for growth while eliminating as many of the potential barriers as possible.

3. Taxes and Tax Benefits

Adopting an LLC legal structure for your business means that you get to enjoy a more favourable tax scheme, specifically with pass-through taxation. With this tax scheme, you can avoid being taxed twice on your company’s income and yours since the profits of LLCs aren’t taxed on a corporate level.

Simply put, this means you only have to pay taxes once since business owners and their members don’t have to pay corporate taxes, only personal income taxes on the dividend distributions and salaries they received from the LLC.

Aside from this, you can also choose how you want to be taxed when you opt for an LLC. This means you can choose to be taxed as a partnership or a corporation if you have multiple members.

4. Restrictions on Profit Distributions

Another notable aspect of LLCs is that members have the right to follow a “special allocation” in terms of the company’s profits. With special allocation, LLC members can agree to distribute the profits they earn from the LLC disproportionately.

What does this mean? In this case, this means that as long as you and your members have an agreement, you can earn more or fewer profits than your actual ownership percentage.

So, even if you own fewer shares in the company than the others, you can still earn more if the others agree to the arrangement. The same applies if you hold more shares but would like to receive less.

In contrast, corporations are required to distribute their profits or dividend payments according to how many shares each member holds in the company.

5. Ownership Restrictions

Opting to create an LLC instead of a corporation also means that you have more freedom as to how many stockholders you can have for your company. With LLCs, you don’t have to worry about the number of owners you have; you can have as many as you want.

In contrast, corporations, especially S-Corporations, tend to have restrictions when it comes to how many stockholders you can have. In this case, you can’t have over 100 shareholders, and they must comply with specific requirements, such as being a US resident or citizen.

6. Company Management

LLCs also offer business owners a higher degree of flexibility since this legal structure allows the company to be managed by its members. This means that no single person is responsible for the whole company’s operations; all members are equally responsible.

Of course, you also have the option to assign one or more persons to serve as managers for the business. In this case, these can be members, non-members, or even a good blend of both.

7. Credibility

Incorporating your business as an LLC is also the simplest way to boost your company’s credibility. This is because it establishes your business as a government-recognized one, which can reassure customers and potential clients that they’re dealing with a reputable company.

Aside from this, incorporating your business as an LLC also opens your business up to more opportunities for additional benefits in the industry, such as being allowed to open a separate bank account for your business.

As an LLC, financial institutions are more likely to approve your application so that you can separate your company’s finances from your personal finances.

Final Thoughts

Overall, LLCs are an excellent and most straightforward way to establish your business as a separate legal entity so you can enjoy better protection against liability and a favourable tax scheme, among other benefits. You can get your LLC registered with minimal fees with online legal services such as Zenbusiness or Legalzoom.

With that said, hopefully, this article has helped you better understand this unique business legal structure.

 

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