What is LLC? Types of Limited Liability Company

Introduction

A Limited Liability Company (LLC) is a business form in the United States that combines the personal liability protection of a corporation with the tax efficiency of a sole proprietorship or partnership. Before I go into the many scenarios and LLC kinds that may be most beneficial, let’s take a look at the most common LLC versions available to business owners.

What is LLC (Limited Liability Company)?

Legislation creates an LLC as a legal entity, and the laws of the state in which it operates govern it. The business form combines a sole proprietorship or partnership’s pass-through taxation with a corporation’s restricted liability. For most business owners, this is an excellent position.

Although each state has its own set of restrictions for LLCs, the legal framework is identical. A member of an LLC is the owner, and LLCs can have one or more members. Forming an LLC allows you to keep your personal and business assets separate, produces far less paperwork than a typical corporation, and gives you more freedom in designing your organization to your needs.

Some businesses create LLCs for professionals like doctors and lawyers, while others form them to benefit from interstate commerce rules. Smart business owners prefer LLCs to corporations because they have personal liability protection without having to deal with the red tape, paperwork, or formalities that can be challenging for a small business, a startup, or a solo entrepreneur.

Advantages of LLC (Limited Liability Company)

• Forming a Limited Liability Company (LLC) protects personal liability. This ensures that if someone sues your company or it defaults on a loan, your assets such as your house, vehicle, and bank account remain safeguarded.
• Potential for expansion – Because they provide tax benefits, and personal liability protection, LLCs can increase in risk and profit.
• Consumer Trust and Credibility – In general, banks and consumers trust LLCs more than informal business arrangements such as sole proprietorships. This can destroy a company’s ability to borrow money and its marketability.
• Tax advantages – Limited Liability Companies (LLCs) have the ability to tailor their tax structure.

Types of Limited Liability Company (LLC)

1. Limited or General Partnership

A family limited partnership is identical to a limited partnership, except that it is owned by family members. Families typically form an LLC as a limited or general partnership and invest their assets in it. They can also delegate power and membership to other relatives, giving them entire authority over their assets.

2. Sole Proprietorship or Single Member LLC

A single-member LLC, as the name implies, has only one owner. In the same way as a sole proprietorship does, the owner is directly liable for:

• Transactions within the company

• Taxes that the company owes.

If a single member LLC chooses not to form a corporation, the IRS treats it as a “disregarded entity” and taxes it as a sole proprietorship. The IRS can also tax LLCs as corporations.

The most common file type and the most cost-effective LLC formation is the single-member LLC. There is also a huge reduction in the amount of paperwork necessary.

3. Professional Limited Liability Company (PLLC)

A professional Limited Liability Company differs from a conventional LLC because only professional license holders (such as physicians, attorneys, and accountants) can register it. Like a conventional LLC, a PLLC can choose to be taxed as an S Corporation. Which can help its members reduce their self-employment tax burden.

4. General Partnership

A general partnership is a preferable structure for forming an LLC with several members. This means that all owners are responsible for the company’s transactions, obligations, and taxes. Each member can also decide when to sell assets and handles paying taxes on their share of the business income.

A Limited Liability Company (LLC) is beneficial to a small or medium-sized business. The fact that numerous people share obligations is the same in both general and limited partnerships. However, one significant distinction is that a single member handles the entire liability. This also leaves one person with the least amount of risk.

5. Manager-Manged or Member-Managed LLC

You must set up your chosen structure in the operating agreement when founding an LLC. This allows you to choose between a member-managed LLC and a manager-managed LLC (Limited Liability Company).

The simplest structure is a member-managed LLC, which is run by the company’s owners. Every business owner has the power to act on behalf of the company.

A manager managed Limited Liability Company is used when the LLC has passive members, such as investors.

6. Series  LLC (Limited Liability Company)

Series LLCs are business entities that have a parent (umbrella) LLC and other LLCs (“series”) beneath it with their own liabilities, debts, and rights (available in some states but not all). Individual series in a series LLC are usually taxed separately.

7. Foreign and Domestic LLC

Foreign LLC: If an LLC registers as a domestic LLC in one state but does business in another (physical presence or economic nexus), it must file as a foreign LLC in the other state(s).

Domestic LLC: When a state registers an LLC’s formation paperwork (Articles of Organization), it becomes a domestic LLC there. The company’s domicile is in that state (known as a home state).

Things to keep in mind, While selecting a type of an LLC (Limited Liability Company)

• Owners must decide whether to actively manage day-to-day business decisions and operations or take a more hands off approach.
•  If they want to be involved in the day-to-day operations of the company, they will probably choose a member managed LLC.
• They may choose a manager managed LLC if they prefer to appoint one member or hire someone else to handle day-to-day business obligations.
• When a business owner forms an LLC in one state and wants to expand into another, they can “foreign qualify” in the new state to do so.
• Foreign qualifying refers to obtaining approval to conduct business in a state where a corporation seeks to expand its activities.
• If a corporation maintains a physical presence or economic tie in the state, it must obtain foreign qualification upon reaching a certain income threshold.
• In the state where they file the formation paperwork, they refer to a brand-new LLC that does not exist anywhere else as a Domestic LLC.
• The LLC files Articles of Organization to establish the state as its home state.

Conclusion

You may quickly register a Limited Liability Company (LLC) online. Visit the Secretary of State’s website in the state where you wish to register to find out what you need to do when organizing your LLC. Prepare yourself for the data you will need to enter into the Articles of Organization. Along with filing this paperwork, you’ll have to pay a relevant fee.

Suggested Read :

Advantages of LLP Company

LLP Registration Process

Process to Change LLP Agreement

LLP Strike off vs Winding up

LLP agreement vs Partnership Deed

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