Introduction
Starting a firm might be difficult, but it can be simple with the proper legal formalization. The liability protection of a corporation with the adaptability of a partnership or sole proprietorship is combined in a limited liability corporation (LLC), a form of company organization. This means that the owners of the company or its members are only partially personally liable for their obligations and deeds (Travis, 2019). The members’ private assets would not be in danger if the company ran up debts or legal issues.
The flexibility it affords in terms of taxation is one of the main benefits of forming an LLC. It is important to remember, though, that not all firms should use LLCs, and business owners should consider several things before choosing this form. An LLC, for instance, offers freedom in ownership and management, but it might not be the greatest option for businesses looking to raise money or those wanting to go public.
Differences Between LLC and Sub-S Corporation
LLC has unique features that make it stand out from other business organizations. The freedom it offers regarding taxation is one of the key advantages of establishing an LLC. An LLC is, by default, regarded as a pass-through entity for taxation purposes. This indicates that while the firm does not pay taxes, the earnings and losses are carried through to the members’ tax returns (Travis, 2019).
Consequently, the firm and its members may pay less in total taxes. Unlike a corporation, an LLC offers a simpler and more streamlined management structure, liability protection, and tax flexibility (Travis, 2019). LLCs can save time and money by not having annual meetings or maintaining formal minutes. They are often simpler to create and dissolve and have fewer regulatory constraints.
There are also differences between an LLC and a Sub-S company. Similar to an LLC, a Sub-S company is a corporation that chooses to be taxed as a pass-through organization. A Sub-S company, however, has more stringent rules for administration and ownership than an LLC. For instance, Sub-S companies are restricted to a certain number of shareholders, and each shareholder must be a citizen or resident of the United States. The manner in which they are taxed is another distinction between an LLC and a Sub-S company.
Even though both businesses are pass-through entities, Sub-S corporations are subject to stricter rules and documentation demands than LLCs (Azoulay et al., 2020). The firm may incur increased administrative costs as a result. Thus, the essay aims to discuss how it varies from other legal entities, such as a Sub-S company, as well as its advantages and disadvantages.
Advantages and Disadvantages of LLC
Like any other corporate structure, an LLC has positives and negatives. Examining these advantages and disadvantages will help determine if an LLC is right for business (Travis, 2019). An LLC’s limited personal liability protection is one of the most important benefits of creating one. The LLC’s legal structure protects the owners’ or members’ private assets from the debts and liabilities of the company (Harris, 2020). This implies that members’ private assets, such as their houses or savings, are safeguarded in the case of financial difficulties or legal action.
An LLC provides flexibility about taxation. By default, an LLC is classified as a pass-through entity for tax purposes, meaning the business itself is not taxed, but its profits and losses are reported on the member’s individual tax returns (Harris, 2020). However, if taxing as a corporation is more advantageous for the firm, an LLC may also choose to do so. Compared to a corporation, an LLC is a comparatively straightforward company offering a simplified management framework.LLCs can reduce costs and administrative burdens by avoiding annual meetings and formal record-keeping. They are generally easier to establish and dissolve while facing fewer regulatory requirements.
Although an LLC provides tax freedom, members are still obligated to pay self-employment taxes on their portion of the business’s income. The company’s and its owners’ overall tax burden may increase (Harris, 2020). In some states, an LLC must be dissolved upon a member’s death or departure because it has a finite lifespan. Due to this, it could be challenging to sell the company as a continuing concern or pass it on to the next generation.
Completing the appropriate legal paperwork for an LLC can be more expensive than forming a sole proprietorship or partnership due to filing costs and attorney expenses. Compared to companies that may raise money by issuing stocks, LLCs may have less access to financing. This may make getting finance for business needs such as growth more difficult.
The Process of Forming an LLC
Forming an LLC may be very simple, but it requires the correct advice and assistance. Choosing a name for the company is the first step in founding an LLC. The name must be original and unclaimed by another company operating in the state (Guzman, 2018). Search the state’s corporate entity database or contact the Secretary of State’s office to see whether the named person’s wants are available. Articles of organization must be submitted to the Secretary of State’s office to form an LLC (Guzman, 2018). The LLC’s name and location, the registered agent’s name and address, and the members’ names and addresses are all included in this document, which legally declares the company to be an LLC.
Although it is unnecessary in many states, an operating agreement is strongly advised for LLCs. The management structure of the LLC, the duties and obligations of the members, and the allocation of profits and losses are all described in this agreement (Guzman, 2018). An operational agreement may help prevent misunderstandings and guarantee that everyone is on the same page immediately.
Depending on the type of firm, there might be a need to apply for permissions or licenses from local, state, or federal organizations (Guzman, 2018). For instance, to run a company in a certain city, a person might need a landscaping license or permission if they are beginning a landscaping firm. The IRS issues firms with a unique nine-digit number known as an Employer Identification Number (EIN) for taxation (Guzman, 2018). An EIN must create a company bank account, file taxes, and carry out other business-related tasks, even if the LLC has no workers. LLCs are responsible for paying all federal, state, and municipal taxes, including sales and property taxes. To ensure individuals comply with all tax rules, entrepreneurs must register for these taxes with the proper state and municipal agencies.
An individual must visit the Secretary of State’s office, speak with a business attorney, or use a formation service to begin creating an LLC. Articles of organization filing and license and permit acquisition can be facilitated by online formation providers like LegalZoom and Incfile (Guzman, 2018). Dealing with a lawyer may assist an individual in ensuring they adhere to all legal standards and can ultimately save time and headaches.
Duration of the LLC
The life of an LLC is often finite, as opposed to a corporation, which has an eternal existence. An LLC is created in most states either for the duration specified in its articles of formation or until its members dissolve it. Nonetheless, several states permit the eternal existence of LLCs (Harris, 2020). Members often contribute cash or the first investments in the business while founding an LLC. These donations, which might come from money, goods, or services, are used to finance the company’s start-up costs. The operational agreement specifies the type and quantity of contribution that each member must provide.
The division of earnings and losses among members is flexible with LLCs. Regardless of capital inputs, all members automatically share gains and losses equally. In the operational agreement, members may choose a different division of earnings and losses (Harris, 2020). For instance, a member who invests more money or plays a bigger part in the company could get a bigger earning cut.
The limited liability protection that an LLC provides to its members is one of the main advantages of creating one. This indicates that the members’ private assets are often shielded from the company’s debts and liabilities. There are a few instances where this protection is not applicable. If a member engages in dishonest or unlawful activity, personally guarantees the LLC’s obligations, or neglects to keep their personal and corporate money separate, they may be held personally accountable.
The Differences Between Member Management and A Manager-Managed LLC
Owners of businesses can select between member-managed and manager-managed management structures when founding an LLC. In order to assist a person in choosing which management structure could be the most advantageous for his company, we will compare and contrast these two kinds of LLCs in this article. A member-managed LLC is a style of LLC in which every member can decide how the company is run daily. In a member-managed LLC, all members, regardless of their capital contributions or ownership percentages, have an equal voice in the decisions made by the company (Mikalonienė, 2020). Small LLCs desiring full member participation in business management should choose this structure.
An LLC managed by one or more managers chosen to make decisions and oversee day-to-day business operations is a manager-managed LLC. In an LLC managed by managers, the managers are not required to be LLC members and may or may not possess stock in the business (Mikalonienė, 2020). This arrangement is perfect for bigger LLCs when not every member wants to be involved in day-to-day operations.
The degree of member participation in corporate management is the primary distinction between member-managed and manager-managed LLCs. In an LLC that is member-managed, each member has an equal voice in the company’s decisions (Mikalonienė, 2020). In an LLC that is manager-managed, the management is in charge of making decisions and overseeing the company’s operations. The degree of liability that members of the business have is another distinction. All members of a member-managed LLC are regarded as the company’s agents and have the authority to bind the LLC to agreements and contracts (Mikalonienė, 2020). This implies that any obligations or liabilities incurred by the LLC may be personally accountable to the members. A manager-managed LLC limits the members’ liability by allowing only the managers to bind the LLC to contracts and agreements.
Members of an LLC have obligations to the business and to one another under the law. These obligations include acting in the LLC’s best interests, taking reasonable care in managing and supervising the company’s affairs, acting honestly and in good faith when performing their obligations, and adhering to the operating agreement of the LLC as well as any applicable laws and regulations. These obligations may differ depending on state laws and the terms of the LLC’s operating agreement.
LLC members have a fiduciary obligation to behave in the company’s and its members’ best interests. This obligation includes making judgments with reasonable care and competence, operating honestly and in good faith, and avoiding conflicts of interest. The biblical concept of stewardship, which is the proper management of resources God has entrusted to people, is consistent with this obligation. Since wealth does not last forever and a crown is not guaranteed for all generations, Proverbs 27:23–24 advises, “Be sure you know the condition of your flocks; give careful attention to your herds” (English Standard Version Bible, 2001, Proverbs 27:23–24). This passage stresses the significance of prudent stewardship and management.
Conclusion
Overall, a limited liability corporation is a business structure that combines the flexibility of a partnership or sole proprietorship with the liability protection of a corporation. It offers a simpler and more efficient management structure than a Sub-S corporation. It also has stricter administration and ownership requirements than a Sub-S corporation, such as a cap on stockholders and requiring each shareholder to be an American citizen or resident. The limitations on personal liability protection, the tax flexibility, and the ease of management are the three most crucial aspects of setting up an LLC. Members have duties to the company and one another, including upholding the operating agreement, acting honestly and in good faith, acting reasonably, paying taxes, and maintaining correct records.
References
Azoulay, P., Jones, B. F., Kim, J. D., & Miranda, J. (2020). Age and high-growth entrepreneurship. American Economic Review: Insights, 2(1), 65-82. Web.
English Standard Version Bible. (2001). ESV Online. Web.
Guzman, Z. (2018). According to a man who makes a living blogging about how to form an LLC correctly. CNBC. Web.
Harris, R. (2020). A new understanding of the history of limited liability: an invitation for theoretical reframing. Journal of Institutional Economics, 16(5), 643-664. Web.
Mikalonienė, L. (2020). Individual Owner Compensation in a Hybrid Limited Liability Entity in a Comparative Context: LLC (the USA), LLP (the UK), and the Small Partnership (Lithuania). European Business Organization Law Review, 21, 915-936. Web.
Travis, A. (2019). The organization of neglect: Limited liability companies and housing disinvestment. American Sociological Review, 84(1), 142-170. Web.