If an individual is considering to start a business, there are multiple business structures one can use including a limited liability company (LLC). Today more than ever, there are more business options available to entrepreneurs and a LLC is one of the most popular entities.
In the United States, a limited liability company (LLC) is a form of a private limited company and is the simplest way of structuring a business to provide personal liability protection. It is defined as:
“a corporate structure whereby the members of the company cannot be held personally liable for the company’s debts or liabilities. Limited liability companies are essentially hybrid entities that combine the characteristics of a corporation and a partnership or sole proprietorship.“ (investopedia.com)
Personal Liability Protection
The LLC was created from business owners’ desire to have a business structure that allowed them to operate like a traditional partnership. Their initial goal was to allow them the ability to distribute income to their partners but protect themselves from any personal liability for the business’s debts. The rules of a LLC state an individual isn’t responsible for the debts of the company as long as he/she didn’t secure them personally.
LLCs are recognized throughout the 50 states and allow any entity, such as individuals, estates, trusts, partnerships, corporations and even other LLCs, to be owners. Compared to corporations, LLCs offer greater flexibility in the management structure, such as no limit on number of members, and have the same advantages of a partnership. Basically, LLCs are hybrid business organizations that have the best advantages of corporations, partnerships and sole proprietorships all mixed into one organization.
LLCs Tax Advantages
Many business owners prefer a LLC because of its tax advantages. This corporate structure has pass-through taxable income and losses so there is no taxation to the business itself but are instead passed through to the individual members. It is then reported on their individual tax returns. This allows the LLC to avoid being taxed twice on the income upon the business and the owners.
Additionally, since the owner of the LLC do not assume liability for the business’ debt, he/she can receive tax deductions on any losses of the LLC against their active income. Although LLCs are recognized throughout the U.S., not all states are uniform in their tax treatments of this entity. Texas, for example, does not offer as many tax advantages since the state taxes LLCc like corporations.
It is critical to be aware of each states rules concerning LLCs when choosing which organization is best to set up a business. Determining if a LLC is ideal for one’s business will depend on certain qualifications and considerations and there isn’t a one size fits all mentality with any business structure. It is vital for any business owner to consult with an attorney and CPA before deciding which structure is best.
If you like to read about alternative investments, oil and gas, real estate, and find out more about hidden markets, make sure to subscribe to our monthly newsletter.