Now that your small business is growing, its important to protect both your company and your own assets. Forming an LLC can help do that  but is it the best business entity choice for you? We’ve written a complete guide to forming an LLC to help with your decision.

What Does LLC Stand For & What Is an LLC?

LLC stands for Limited Liability Company and has rapidly become one of the most popular business entity types for new and small businesses, largely because it is considered to be simpler and more flexible than a corporation. The LLC business structure combines the pass- through taxation of a partnership or sole proprietorship with the limited liability of a corporation, creating the best of both worlds for business owners. This means that if you choose to form an LLC, your business will become it’s own legal entity that has separate debts and legal matters.

However, LLC’s are still tied to your personal taxes. If you are the owner of an LLC, you are referred to as a member, and LLC’s can have a single member or multiple members ? it’s up to you. Read on to understand the advantages and disadvantages of forming an LLC, asset protection, amending and dissolving an LLC, common LLC terms and more.

What Types of Businesses Should Choose an LLC?

If you don’t plan on raising investment money for your business, think you might need asset protection and need flexible business management and taxes, then an LLC is likely the best choice for your business. Whether you are a sole proprietor, have a partner, or a multi-member corporation, the LLC is a great choice for small business owners, as it can provide the same limited liability protection as a corporation, without many of the complexities and formalities associated with them. We see all sizes and verticals of businesses forming an LLC from LLC’s for real estate agents or financial advisers to solo businesses such as personal trainers or even marijuana businesses. A number of entrepreneurs decide that a n LLC is the business structure that fits their needs.

Some businesses are prevented from forming an LLC, however. Typically, financial companies such as banks, financial trust companies and insurance agencies can’t file as an LLC. LLC’s are sometimes limited for industries in certain states, too. For example, if you live in California, you can’t form an LLC if you’re an architect, accountant or licensed health care provider.

LLC Advantages & Disadvantages

An LLC has many advantages that can work for different types of companies, however there are also disadvantages to forming an LLC as well. Here are some of the most common LLC
advantages and disadvantages:

Business Asset Protection with an LLC

The LLC, much like a corporation, provides the LLC owners with limited liability asset protection. This means that the company assets are typically owned by the LLC and are separate from the personal assets from that of the LLC owner(s). Should there be a lawsuit aimed at the company, whether with or without merit, the LLC is the legal entity that would be sued. The assets of the LLC could be attacked, however that would be separate from the personal assets of the LLC owner(s), which would be protected.

The potential liability of an LLC owner is limited only to whatever that owner has invested in the LLC, such as an initial, investment or any retained earnings. This is very much the same as if you had purchased shares of stock in a corporation. In most cases, the most you can lose is what you paid for the stock, but you typically will not lose more than that, no matter how much the company might potentially lose or for however much the company might be sued.

Business Structure & Management for Your LLC

Unlike corporations, LLC’s are much less formal in structure and how it is managed. The
business structure of the LLC is very much the same as that of a partnership (or a sole
proprietorship in the case of a single member LLC), but with the limited liability protection, discussed above. The management of the LLC is typically invested in all of the LLC members, which is the generic term for the LLC owners.

The LLC members or owners are the ultimate authority, and are responsible for all aspects of the LLC. There are no separate positions like there are with a corporation (which requires shareholders, directors, and officers). An LLC member is like all three of those corporate roles in one (although LLC members may certainly have any titles they deem appropriate, and may agree to divide up various responsibilities in whatever way the members see fit); all members have complete authority over the LLC.

The LLC ownership is typically expressed in percentages (e.g. Sara and Jim each own 50% of S & J ENTERPRISES LLC) as opposed to the shares of stock that a corporation would have. Another business entity can even be a member of an LLC.

Types of LLC’s

  • Domestic LLC: If your LLC is formed and operating within your state, this is a domestic LLC. Your state has the authority to govern your LLC if formed within their jurisdiction.
  • Foreign LLC: This does not mean that the LLC was formed internationally and operating in the U.S. A foreign LLC is operating in a different state than the LLC was formed in. For example, you might have formed your LLC in Texas, but you’re operating your LLC in Georgia.
  • Member-Managed LLC: This type of LLC is where all owners (members) are operating the business themselves, equally. This is the most common type of LLC.
  • Manager-Managed LLC: If some of your business partners want to remain passive in running the business, then this type of structure is a manager-managed LLC. Either members or nonmembers can be delegated as a manager.
  • Single-Member LLC: Simply put, this is an LLC with only one member.
  • Multiple-Member LLC: Simply put, this is an LLC with multiple members. A multi-member LLC must be more careful in spelling out carefully with the LLC Operating Agreement the rights of each member in case the LLC folds or there is a death or disagreement.
  • Series LLC: A Series LLC is a unique for of an LLC that acts as a master LLC or umbrella over a series of separate legal entities. This can be a series of members, assets, managers or interests.
  • Restricted LLCs: Restricted LLC’s are a type of LLC available in Nevada only that were launched in 2009. These types of LLC’s choose to be restricted within their Articles of Organization and therefore cannot make certain business distributions among members until 10 years after forming their LLC.
  • L3C: An L3C company is a for-profit company with a stated philanthropic social purpose. This type of LLC is a hybrid business structure that uses the legal and tax flexibility of an LLC, the social benefits of a nonprofit organization, and the branding and market positioning advantages of a social enterprise.
  • Anonymous LLC: An anonymous LLC is where the ownership details of the LLC is not made public by the state the LLC is registered. New Mexico is one of the only states that allows for truly anonymous LLC’s.

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February 2024