A LLC or Limited Liability Company combines the features of a corporation and a partnership. Should not be called a corporation although a lot of people make the mistake. The LLC is best described as a new company formed between members. So you might have a corporation as one member, John Doe as a member and even a Church as a third member. It is the structure that allows for different structures to combine to form a new company without worrying about shares and things of that nature.
Strengths of a LLC
- The members of a LLC personal assets are protected if they ever get sued just like a corporation
- A LLC can decide how to distribute profits like 5% to John Doe, 15% to the Church & 80 percent to the corporation. There isn’t a demanding 50/50 split like in most partnerships.
- You don’t have to keep records or minutes like you do with corporations
- All the profits, losses and expenses flow directly to the individual members
- Taxes are assessed based on the percentage of the each member of the LLC
- Cheaper than a corporation to form.
- LLC is not recognized by the IRS as a taxable entity
Weaknesses of a LLC
- A LLC dies as soon as one member dies or goes bankrupt
- If the LLC turns into a big company it will be better served if it turns into a corporation
- A LLC will be taxed by the number of members. So a 1 person LLC is a sole proprietorship, 2 or more members makes it a partnership or a corporation for tax purposes. Sometimes the IRS will choose one for you.
- Some states limit the types of businesses you can operate as a LLC. Such as a bank or a farm, you have to check with your state as to what they limit.
Setting up a LLC
- Fill out a Articles of Organization and file it with your Secretary of State and pay the fees
- Create a Operating Agreement which shows the percentages and how money is to be split, who is in charge of operating the company and how ownership changes will be handled.
The only benefit I see of a LLC is the ability of different corporate structures to come under one company header. The ability of one person to go into business with a corporation makes this attractive instead of coming up with a new corporation.
See you Tuesday for a LLP aka Limited Liability Partnership…
Popularity: 8% [?]
This is the structure I want to use as it seems to be better than a corporation. I don’t get what a pass through entity means can you explain? What do you mean a LLC is not recognized by the IRS don’t they have their own Tax Id? Can you give me a link to a place where I can read some more? Do you have a LLC?
Man when I miss some time here I miss a lot. Bottom line Freeman which structure to you think is best and why?
@Califormula – A LLC is one of the easiest ways to set up a business as strong as a Corporation. For tax purposes they treat you as a Sole Prop if it’s one person and a partnership if it’s 2 or more. This is the key difference as a corporation is taxed as a corporation. A pass through entity means the money goes directly to the members meaning the money is divided up according to the percentages agreed upon.
IRS doesn’t recognize it becuase the tax the individual. So the LLC will have a tax id but since it’s not a corp it’s treated the same way you would get taxed if it was a Sole Prop or a partnership.
http://www.themoneyalert.com/Corp-Entity-Table.html
http://www.irs.gov/businesses/small/article/0,,id=98277,00.html
I use S.Corps as it’s a sole prop with corporate protection. People get scared of the paperwork but it’s really not anything to worry about besides writing down the moves you make. Example : 2/9/10 Opened up bank account with Chase 2/11/10 Closed bank account with Chase because they are devils!
@OTM – S.corp to me is the best because LL means limited liability no matter what they say. See when you get sued in order to get money from the owner of the S. Corp you have to pierce the corporate veil. That means they have to prove I wasn’t running my corporation properly and that’s hard to do. Now LL means someone has to pay and that’s why it’s limited.
With a S.Corp you won’t lose your house and any money that is not kept in the corporation. They can’t sue me for anything so if I fold up the corporation or the corporation has no money they are assed out. This is why everyone is a corporation not a LLC, LLP and especially not a Sole Prop. Business is not only about making money but also about protecting yourself and Corporations are the best at it. So why not follow the leader.
I’ll talk corporations later on this month so stay tuned!