Limited Liability Companies offer vital advantages compared to other businesses. We know that most new small business owners start as LLCs - see the best ideas to start a business - because of these outstanding benefits (see also 'Small Business Grants').
An LLC combines positive attributes from corporations (see all about incorporating), sole proprietorships (see 'LLC vs Sole Proprietorship'), and partnerships overriding their downside. One outstanding feature is its liability debt limits because it is legally separate from the founders and owners or any stakeholders.
That shows you that an LLC is responsible for its obligations and debts. The only money you can lose is the one you invest within the company (see also 'Company vs Business'). But personal assets like your bank account (see which banks to turn to for your small business) or your home can't serve as recompense for business debts. There are several significant LLC advantages that you will learn through this article (see also 'What Is LLC?'). Finally, when it comes to strategizing, you should be familiar with SWOT analysis we explained here, to keep your business successful in the longer run.
1. Limited Liability to the Owners
For a partnership or a sole proprietorship business, you and your business become one. That's because your business debts have no personal boundaries and your assets are at risk when there's the negligence of debt payments.
That is different with LLCs since this type of business takes care of its obligations and debts. The only amount you may lose in case of negligence is the investment made to the company but not personal assets like your account or home.
2. Reduced Amount of Paperwork
If you own a corporation or have worked in one, you know how tedious the paperwork can get. In addition, though the corporations have limited liability, they must observe specific requirements that may be unfitting for a small informally operated firm.
Such requirements include annual meetings for the shareholders, yearly state fee payments, and annual reports. Also, corporations must have substantial recordkeeping.
For LLC, they don't have to hold annual meetings with extensive record keeping. Plus, many LLCs don't file yearly reports, but they are secure, and you enjoy the privileges of corporations without observing their protocols (see 'LLC vs C Corporation').
3. Tax Advantages of an LLC
Limited Liability Companies have no tax classification (see 'Small Business Tax Guide'). They can, therefore, adapt to sole proprietorship S or C corporations and that of partnerships making LLCS get the best of both worlds.
Revenue Services automatically classify an LLC as a sole proprietorship or a partnership by considering its ownership (see also 'Transferring Ownership of an LLC'). Suppose it has a single owner or more owners. Then, it can take advantage of the pass-through tax where this firm won't pay corporate or LLC taxes, but the LLC's incomes plus expenses go through owners' tax returns, and each owner pays taxes on the profits as personal income tax.
Opposed to LLC, conventional S corporations get twice taxations (see 'S Corp vs LLC'); on shareholder distributions corporately and individually. However, some S corporations avoid double taxation because they may receive a tax treatment pass-through with LLCs' absolute tax benefits.
4. Ownership Flexibility
As we saw above, S corporations enjoy taxation pass-through. However, there are ownership restrictions that are not present with LLCs. For instance, a corporation can't have foreign shareholders, shareholder corporations, or more than a hundred owners.
On the other hand, LLCs can have as many investors and owners and still enjoy the pass-through taxation privileges. Plus, LLCs can have foreign shareholders (see more reasons to start an online business here).
5. Management Flexibility
Most of us love an informal structure where business owners can make free choices and run the business (see 'Business Structures'). That flexibility gets vivid with LLCs but absents in other businesses like corporations.
With a business like a corporation, the management and ownership are fixed, consisting of elected directors who oversee the policies and officers who conduct daily tasks. The owners (shareholders) meet annually for elections which shows zero flexibility.
6. Flexible Profits
LLCs distribute profits flexibility to the owners without necessarily following ownership percentages or equally. Their flexibility has impressive advantages. Also, when it comes to salaries, see 'How To Pay Yourself LLC' post.
For example, if two owners with equal rights may agree that one may get more profit than the other based on their different labour inputs, one may get more profit than the other. Corporations aren't flexible because they distribute their earnings strictly according to shares and numbers.
7. Ease of Forming a Limited Liability Company
Forming an LLC is more straightforward than that of a corporation. Plus, it requires less paperwork . LLCs operate under the laws of their location (to comply with all licensing requirements look at 'How To Get A Business License'). Hence the formation process relies on the rules of the state it is situated (see also the best LLC formation services review).
Forming LLCs: LLC Outline
To form an LLC, you are required to fill out the article of association. To start a private limited liability company, you need to choose a unique name that does not rhyme with another company's name (see 'How To Become An Entrepreneur'). Plus, the character must have the word "limited" or "ltd" at the end. Also, those who don't want to start from scratch should see our 'How To Buy A Business?' post.
Limited Personal Liability
Shareholders' liability is dependent on share value. In an LLC, the business is separate from its owners, and it has separate finances from owners' ones guaranteeing your assets liability protection.
To register a new LLC in the UK, for instance, you'll send applications to the Government's Companies House. You must choose a unique name, have an address (see 'Can I Use My Home Address For My LLC?') and appoint a director before sending the application.
Also, you need the details of the shares and must have single or more shareholders. Then select a SIC code that points to the exact location of the firm. Your shareholders ought to form written rules of the Article of Association plus a Memorandum.
Lastly, describe the most shareholders with significant control over your company, usually, those who hold more than twenty-five per cent voting rights or shares). You can use online mail or an agent - see the best ones here - to register your firm.
After the registration, you get issued a "Certificate of Incorporation" verifying your LLC's legal existence. It also has the date of formation and the LLC business number. Once you form the LLC, it's vital to develop member responsibilities and roles.
LLCs majorly use an operating agreement to define member roles. Drafting operating agreements isn't a necessity for LLC validation. However, it's prudent to prepare one because it can help your LLC deal with capital structure, allocation of losses and profits to the members, buyout member provisions, provision in case of a member's demise, plus other LLC business considerations.
Many single-member LLC shareholders are limited based on shares (see also 'Single Member vs. Multi-Member LLC'). That means they have rights like voting rights or agreeing or disagreeing with specific company policies and changes.
Shareholders with LLCs are unlimited with no minimal share values. As you register, indicate your company's share info in the "Statement of Capital" as per the requirements therein.
Articles of Association and Memorandum
The "Articles of Association," also called articles of organization documents, include rules on running the LLC as agreed upon by the directors, shareholders, and owners.
On the other hand, the "Memorandum of Association" is the document signed by the original owners who agreed to start the LLC.
Every LLC signs up for Corporation Tax with the HM Revenue and Customs (HMRC). Since regardless of the profits made or losses incurred, the LLC should file its tax returns after every twelve months. Other taxes incurred include Value Added Tax plus Capital Gains Tax.
An LLC isn't required to have annual general meetings. But the board of directors or five per cent of shareholders may call for an appointment. They should notify the members at least two weeks before (fourteen days) the meeting day.
Directors and a Secretary
Every LLC has a director to run the LLC. The director should be at least sixteen years old, and if the LLC has more than one director, one must be a natural person, and the rest can be companies. A shareholder may be a director, and they are responsible for the LLC.
You aren't required to have a secretary, but with one, they should not be the LLC auditor, and he cannot be bankrupt.
Disadvantages of an LLC
LLC's have a flexible and straightforward business structure that is ideal for many medium-sized and small businesses. While LLCs and corporations offer owners limited personal liability, LLC owners may take advantage of the LLC tax advantages, minimal recordkeeping, and management flexibility. All the best in your LLC investment!