If you’ve been around entrepreneurs for a while, you might notice that most talk about forming a limited liability company (LLC). It’s a popular business structure, especially among small business owners in the United States.
So, what’s an LLC, and why is it popular among business owners? This article will provide an in-depth explanation.
What Is An LLC?
An LLC is a business structure that provides the owner (or members) with asset protection. This means their personal properties will be kept separate from business assets and won’t be liable for the business’s outstanding debts, liabilities, and obligations of the business.
Anyone of legal age can form an LLC. It can be established by just one person or by a group of people. Multi-member LLCs can have unlimited members, which could be persons, corporations, or other LLCs.
LLCs are also easy to register and establish. You must file documents—such as an LLC agreement or articles of organization—with your state secretary. After that, you can obtain an employer identification number (EIN) from the IRS, which will be used for filing state taxes or opening business bank accounts.
While an owner can register an LLC by themselves, a registered agent or an LLC formation service provider can also help establish it. Find one registered in your state or read feedback first, like this LegalZoom LLC formation review, to ensure reliable service.
The Different Types Of LLC
Aside from single-member and multi-member LLCs, an LLC can be further classified into the following:
- Domestic LLC – This type of LLC does business in its home state. For example, if you registered your business as an LLC in Texas and are doing business in that state, your enterprise is called a domestic LLC.
- Foreign LLC – A foreign LLC does business in a state outside its origin. For example, if your LLC in Texas wants to do business in Kansas, then you have to register your business as a foreign LLC in Kansas.
- Series LLC – It comprises a parent LLC and other LLCs under it (called cells). Business owners use this LLC type to protect multiple branches and business interests. Each cell operates as a separate entity, which means that any legal issues or debts incurred by one cell don’t affect other cells or the parent LLC.
- Private LLC – This is an LLC that doesn’t disclose its members’ names and personal details. However, most states don’t allow this.
Whether an LLC is classified as domestic, foreign, series, or private, they all offer the same kind of limited liability protection for its owner or members.
What Makes LLC Popular Among Entrepreneurs
Entrepreneurs can form a partnership, corporation, or LLC to register and protect their businesses. However, the LLC structure is more popular among solo entrepreneurs and small business owners for the following reasons:
1. Easy To Establish
As discussed earlier, forming an LLC is easy as you only need to file some documents with the secretary of state. The operating agreement and articles of organization are the most critical documents in creating an LLC.
Unlike corporations, an LLC doesn’t need to have bylaws. This is the main reason small business owners and solo entrepreneurs choose the LLC structure as it makes registering the business easier and faster.
2. Personal Asset Protection
Small business owners enjoy the limited liability protection of forming an LLC. As mentioned earlier, this means that the owner’s personal properties can’t be used to satisfy the debts and obligations of the business. This is a crucial feature that’s not available in partnerships.
Corporations offer limited liability protection, but they’re more difficult to establish. So, small business owners prefer forming an LLC instead.
3. Straightforward Taxing System
Unlike corporations that pay corporate income tax, LLCs aren’t taxed as a business organization. Their profits, however, must be reported by their owners or members, who’ll be taxed based on their LLC income. This differs from a corporation, where profits are taxed at the corporate level and then again at the individual level when profits are distributed as dividends.
LLCs offer a more straightforward tax structure for small business owners and solo entrepreneurs.
LLCs are relatively easy to establish. This business structure also guarantees asset protection similar to one given to stockholders of a corporation—but without a complicated taxing system.
An LLC is a business structure popular among solo entrepreneurs and small business owners because of its limited liability protection, which ensures that the personal properties of the owner or members can’t be liquidated for the business’s debts and obligations. Aside from that, forming an LLC is easier than registering and creating a corporation. Moreover, owners or members of LLCs don’t have to deal with complicated tax filing requirements.