What Is An LLC? | Limited Liability Company (Pros and Cons)

Should You form an LLC Incfile

It is important to remember that even though you might think you have a great idea for a business, it is only the beginning.

It is important to realize that running a business involves more than just selling products and making a profit.

It would help if you distinguished between an LLC, an S-Corp, and a Corporation as a business owner. You should know what an LLC is.

An LLC is a Limited Liability Company

What exactly is an LLC?

This article will attempt to answer this question.

You have to accept responsibility for running a business. There can be many ramifications.

You must be prepared to take on all the responsibilities associated with running a business.

These liabilities can be legal or financial in nature, or both. It may not be difficult to find a way that protects you and your family against these liabilities and the potential damage they could cause.

You can have all the benefits of a corporation but still, get the protection of an LLC (or Limited Liability Company) for your business.

Many companies can help entrepreneurs discover the full benefits of online business. ZenBusiness is one such online company. We will be discussing them more in-depth later in this article.

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Business entity

A Limited Liability Company, also known as an LLC, is a type of business entity established in 1970 to replace a corporation if wanted.

It can be described as a hybrid of a sole proprietorship and partnership.

An LLC’s basic principle is that members or members cannot be held responsible for company liability, tax debts, and other obligations.

Even if the company goes bankrupt, the family members are protected from having to use their own money to pay any outstanding debts.

LLCs are exempt from corporate tax. The owners of the LLC report the income and losses to their personal income taxes.

Check out our Top 8 Best LLC Filing Services in 2021

LLC vs. Incorporation 

LLC businesses can be viewed as both a legal entity or a tax entity in two distinct ways. Each one is treated in a different way to ensure both are taken care of.

This is how the courts and other levels of government see a company as a legal entity.

The government views a tax entity as a part of a business in determining how tax bills are calculated. These are details that will help you better understand both tax entities and legal entities.

Tax Entity

Even if you’re a single person, setting up an LLC can have its advantages. Taxes will also be different depending on how the LLC is run.

An LLC can be set up as either a sole proprietorship or partnership. Then, taxes will be applied accordingly.

The IRS also offers an additional option, allowing you to request to be classified as an S-Corporation/C-Corporation.

You can still choose to be an S-Corporation, or a C-Corporation, by filling out additional paperwork. However, this option is complicated and cumbersome due to strict guidelines for eligibility.

You can choose to investigate the S-Corporation and C-Corporation options. To be considered an S-Corporation, you will need to file an IRS form 2553. If your business qualifies, it will be taxed accordingly.

You will be taxed if you file IRS Form 8832, and it qualifies. The corporate tax is an additional tax or double taxation that can be imposed on a C-Corporation.

An S-Corporation is exempt from this type of tax.

Setting up your LLC will allow you to avoid paying corporate income tax. The IRS considers it a pass-through entity, and you, as the owner, are considered self-employed.

This means that you only have to pay one tax and that each member of a multi-member LLC would be taxed separately.

Taxation is a complex subject. It is important to weigh all options and carefully consider each one before making any tax decision.

Legal entity

A corporation, a legal entity that includes a business, is the way the owner or ownership group is protected from any legal issues that may arise in the daily operation of the business.

The corporation handles all taxes and liabilities. The owner is completely exempt from any responsibility.

Limited Liability Companies or LLCs were introduced in the US in the 1970s. Their popularity has steadily grown over the years.

Its limited nature makes the LLC attractive to business owners who appreciate its liability protection, taxation options unique, and flexibility in management.

It also offers a simpler bookkeeping process than other corporations.

An LLC is a legal entity that protects against liability to owners or groups. These liabilities include business debts and claims against the company.

This means that if any compensation is ordered to be paid out to a claimant, it will not be the sole responsibility of the owner.

Benefits of an LLC formation for a business

An LLC is a great option for new business owners who are just starting. We have compiled a list of top benefits to choosing an LLC.

Individual Asset Protection 

An LLC protects assets for its owner or group. You are not responsible for any company-related events if you form an LLC.

Only the company can be held responsible for any claims regarding financial or legal standing. If the company files for bankruptcy or takes on a large debt, there is no need to be concerned about losing your nest egg.

Establishes a company officially recognized 

The government recognizes your LLC when you create it. At several levels, the government recognizes it. This will allow you to attract new customers.

Now that you have formed an LLC, prospects will be more attentive to your small business. Your business will instantly gain credibility as an LLC

There is no corporate income tax 

The second-largest benefit, or double taxation, is the elimination of the corporate tax. An LLC allows the owner, or group of owners, to claim any profits or losses from their personal income tax.

The IRS doesn’t get additional income from the business as it would from a corporation.

The Management Structure is flexible 

A corporation must have a strict management structure. This includes a board that meets every year to review company policies and take decisions.

An LLC doesn’t have to adhere to rigid structures and can be flexible in how it runs its day-to-day operations.

Multiple owners options are possible

An LLC can have multiple owners. Each owner is called a member.

There are no restrictions on the proportion of ownership that can be divided up between them.

There are no restrictions on how capital is divided among members of an LLC.

Financial reporting is much simpler and less complicated

When a business owner is trying to make it a success, paperwork is often far down the list of priorities.

An LLC is far less liable than a corporation for any government obligations. This allows the owner to spend more time running their business.

Disadvantages to an LLC formation for a business 

An LLC has its own set of downsides, just like any other business venture. Two significant disadvantages are highlighted in this article that you should consider before forming an LLC.

Outside the USA, LLCs are not recognized 

You might have some problems if you want to sell your products or services overseas.

LLCs are not considered companies in the US, so you will be disadvantaged when trying to compete with other corporations.

There are no dividends to be paid or stocks to issue 

An LLC allows the owner or group of owners to retain all profits and capital. This means that there is no way to raise funds by selling stock.

This will require you to be more creative in raising capital to expand your business.

If you are interested in forming a limited liability company, visit our top 8 best LLC services.

What Is An LLC? | Limited Liability Company (Pros and Cons) 1