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LLCs explained. Learn Everything You Need to Know

If you want to know what an LLC is, how to create one, and everything else, we’ve got you covered with a definitive guide that lists out all the information you need.

There are a host of things to figure out when you’re bringing your business idea into the world. From the right name to the best marketing strategy, you’ll be faced with several important decisions. One such decision is what kind of business model works for your business. Do you want a partnership? Do you want to be the sole proprietor? Or maybe what works best for you is an LLC.

If you’re looking for the perfect blend between a partnership, and sole ownership, an LLC is the perfect business for you. If you want to know what an LLC is, how to create one, and everything else, we’ve got you covered with a definitive guide that lists out all the information you need.

So, what does LLC stand for?

LLCs, or Limited Liability Companies, are hybrid businesses that combine the advantages of a corporation with those of a partnership (or a single proprietorship). 

As a private limited company, an LLC shields its owners (or members) from personal liability for the company's debts and obligations. It also provides a flexible management structure and major tax benefits to its owners. LLCs' laws depend on the state in which your business is registered, and these regulations differ from state to state.

Why is it called a ‘limited liability’ company?

“Limited Liability" is a critical component of LLCs. It protects all LLC owners from personal liability for corporate debts and claims. If a firm can't pay a debt, the creditor cannot go after the assets of the members, including the member's home, vehicle, or other personal belongings. Hence, only LLC assets are utilized to pay off corporate obligations. This means that LLC owners are only at risk of losing the money they put into the company.

Individuals, businesses, foreigners, foreign entities, and even other LLCs can be members in different states since ownership is not restricted. However, the company itself should register under one state. But keep in mind that some businesses, such as banks and insurance firms, are unable to incorporate LLCs.

Furthermore, for tax reasons, an LLC is not regarded as independent of its owners. Instead, it's a "pass-through entity", such as a partnership or sole proprietorship, (as defined by the IRS). This implies that business revenue is passed on to LLC members, who then declare their share of earnings (or losses) on their individual tax returns.

The fundamental reason why business owners want to form LLCs is to restrict their individual responsibility. Many people think of an LLC as a cross between a partnership and a corporation. Essentially, this means that it is a simple business arrangement between two or more owners, as well as a corporation, which provides liability protection.

How to form a Limited Liability Company (LLC)

LLC regulations differ from state to state. Usually, LLCs are subject to state fees, governed by state legislation, and are taxed by both the federal and state governments.

  • The first step to starting an LLC is selecting the state in which you want to register the company.
  • When you register the LLC company, the name of the company along with the registered agent's details must also be noted down.
  • Once you register your LLC, the articles of incorporation can be recorded and filed with the state of your choosing. These articles define each LLC member's rights, powers, responsibilities, liabilities, and other obligations.
  • The names and addresses of the LLC's members will be recorded. The name of the LLC's registered agent and the company's statement of purpose are also contained on the forms.
  • The final step is to create an operating agreement.
  • To further secure an Employer Identification Number (EIN), extra paperwork and payments must be completed at the federal level. An EIN is a nine-digit number that is comparable to a Social Security number. The IRS assigns it to a business organization. Businesses that need to submit various tax returns utilize their EIN in the same way that individuals do with their Social Security number.

LLCs vs. other business entities

When trying to decide what’s best for your company, you might find yourself comparing the Limited Liability Company business model with similar counterparts. Since an LLC is a mix between a partnership, cooperation, and a sole proprietorship, here are a few key differences to consider.

  1. LLC vs. Sole Proprietor

When people first establish a business, they choose a single proprietorship. There is no distinct entity in a sole proprietorship, and the owner is responsible for whatever the company earns. As a result, the proprietor is also responsible for paying personal income taxes. 

It's a little different in the case of an LLC company. This business model is a type of sole proprietorship in which the firm is owned by a group of people. Although the LLC and its members are different legal entities, the members must pay taxes according to the tax rates.

A sole proprietorship is managed by the owner. However, in the case of an LLC, the members may choose to operate the firm themselves or choose a few managers to do so.

  1. LLC vs. Partnership:

The major distinction between a partnership and an LLC is that an LLC separates the company's commercial assets from the owners' personal assets, shielding the owners from the LLC's debts and obligations.

Profits, as well as the duty of paying taxes on them, are allowed to be passed down to the owners of both LLCs and partnerships. When one of the LLC's owners quits or dies, a business continuation agreement can be utilized to facilitate a seamless transfer of interests. The surviving partners will have to dissolve the LLC and form a new one if there isn't such an agreement in place. In the case of a partnership, the shares of the partner are passed on to either the family or split between the surviving partners. 

  1. Limited Liability Company (LLC) Vs. Corporation

An LLC is often confused as being a Limited Liability Corporation. In comparison to a Limited Liability Corporation, an LLC (Limited Liability Company) is easier to form and has far less paperwork. 

Both corporations and LLCs limit the liabilities of their owners. However, LLCs are usually taxed the same as sole proprietorships or partnerships. Furthermore, LLC owners are not employees of the LLC; rather, they are self-employed business owners.

Corporate shareholders who work for the company are treated as if they were employees – and the corporation itself pays taxes on its returns. Employees in companies are classified as C corporations (tax-paying entities that have a low tax rate of 21%) or S corporations (pass-through businesses), for tax purposes. Depending on the classification, an employee under the LLC will be taxed, although the LLC in itself is never taxed. The earnings pass through the company and the members of the LLC are taxed at individual rates.

Now that you know what an LLC is, and how they work, it’s time for you to break down if this works for you. Every business model has its advantages and disadvantages, and it helps to understand both in order to make an informed decision.

Advantages of a Limited Liability Company (LLC)

Personal protection of assets:

In this model, the limited liability protects an LLC owner or member from personal responsibility for any debts incurred by the firm. Most litigation linked to your LLC business is not linked to you directly, either. Creditors or others suing your LLC can't take your personal assets. Your bank accounts, vehicle, or home, are safe since you're not personally accountable. They can only collect from the assets of your LLC, such as your bank account.

Ease of set-up:

An LLC is the most straightforward type of business to set up and run. When creating an LLC, it is not essential to have officers and directors, board or shareholder meetings, or any of the other administrative obligations associated with a company.

Pass-through taxation:

Pass-through taxes are usually available to LLC owners. This essentially means that profits (or losses) incurred by the business are passed through to the owner's personal tax return. Profits from such businesses are taxed at the owner's tax rate.  Thus, a member doesn’t need to pay a high tax rate on the business revenue, but a significantly lower rate on his individual returns.

Options for management:

LLCs can be managed by the members themselves. This means that all the owners are equally responsible for the day-to-day operations of the company. LLCs can also choose one or more managers to oversee the company's operations. Managers can be designated members, non-members, or a mix of the two.

Reputation and credibility of business:

When it comes to owning and running a business, forming an LLC might help you get credibility. It reassures clients that you are a legitimate company. You'll also be able to use an official name for your business.

Flexibility in ownership:

LLCs have the option of choosing how they want to be taxed. Normally, they are taxed as sole proprietorships or partnerships, but single-member LLCs and multi-member LLCs can elect to be treated as corporations. This is simply performed by submitting necessary paperwork with the IRS known as an election. LLCs can then have the option of being taxed as a C or S company.

Disadvantages of a Limited Liability Company (LLC)

Difficulty finding outside investors:

Starting an LLC isn’t the best choice for entrepreneurs looking for outside capital. This is important to note, especially if you're trying to get money from venture capitalists, who usually only invest in corporations. As stock may be issued in return for money from investors, corporations are the ideal choice for outside investments. Outside investors can participate in LLCs and earn LLC ownership interests, although this is more difficult than it is with corporations.

Cost and Expenditure:

Forming and operating an LLC company is often more expensive than being a sole owner or having a partnership. To begin with, you must pay filing costs to create an LLC. Although it is not legally necessary, it is strongly advised that LLCs establish a written LLC operating agreement that outlines how the LLC will be controlled. After the LLC is created, you must also pay the state's yearly fees and taxes.

So, is a Limited Liability Company (LLC) right for you?

Anyone who is beginning a business or has a sole proprietorship can think about creating an LLC. This is an ideal option, especially if you're trying to keep your legal liability to a minimum.

An LLC can own and operate practically any form of business. However, some states need certain types of professionals (like lawyers, doctors, or accountants) to create specific professional LLCs. An LLC can be utilized for any type of business, from sole proprietorships to multi-ownership. LLCs are also the most prevalent legal entity for renting and owning commercial and rental property.

So now that you know what an LLC is, as well as its pros and cons — it’s time to leap. If the Limited Liability company model sounds like the one for your business idea, then look no further. For more details on how to start an LLC, you can check out this article.

Next steps with Hoist: 

Want to form an LLC but not sure of the business idea to pick up? We are here for you!

At Hoist, we’re dedicated to helping you become your own boss. If you’re looking to start a lucrative LLC, Hoist’s dedicated team of experts will help you launch your own painting business in just 30 days. When you partner with us, you get:

> Documentation: 

From business registration to the tedious paperwork, Hoist is with you every step of the way. We’ll help you register your business, create the LLC, design your logo, create your online portal for listings, and much, much more.

> Marketing, branding, and everything in between:

Hoist’s team of professionals will help you find your service area as well as generate high-quality, relevant leads for your business. Basically, we manage over 8 different marketing channels to provide you with full-service marketing

> Training:

We provide training and onboarding that fully equips you to handle the business, in just 45 hours. Hoist’s team has a quick-to-grasp and easy-to-understand training on the Hoist app.  This covers everything from hiring practices to sales and job management. And you can complete your training virtually, and at your own pace.

Plus, your plan covers so much more, including setting payment workflow, website building, qualified sales agents, expert coaching and community support. When it comes to the best resources to make your life easier, picking Hoist is a no-brainer.

So, get in touch with us today and let us help you live your dream!

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