What Is An LLC? [How It Works Explained]

LLC can be elaborated as a Limited Liability Company.

It is one of the prominent choices of all as a small start-up or small business. It offers several benefits and features which makes it an optimum choice to start your small scale business.

LLC incorporates the features of both traditional corporations and partnerships. It is a much better option than individual ownership. LLC can be managed easily than a traditional corporate company.

According to the rules and regulations of the LLC, the owners are not payable for the debts or any accountability.

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Types of LLC

No matter what kind of LLC you are going to start, all types of LLCs provide the same features. Choose your type of LLC to start, according to your business type. The well-known features that are common to every type of LLC are:

  • Limited Liability.
  • Pass-through Taxation.There are different type of LLCs which are running, but the most common type of LLCs is as follows:
  1. Domestic LLC: Any LLC which is running in the same state where it was originated or formed, then this type of LLC is termed as domestic LLC.
  2. Foreign LLC: When any domestic LLC decides to expand or shift to any other province, state, or country. Then, the running LLC needs to register themselves in the second state or country as well to which they want to move or expand. This type of LLC is termed as Foreign LLC.
  3. Professional LLC: The Limited Liability Company that is formulated to offer some professional or legal service, then this is known as professional LLC. To initiate the set-up for any professional LLC, the members of LLC should have proper licenses and degrees for the fair presentation of their professional qualifications. Before you commence the registration for professional start-ups, consulting your legal counsel would be beneficial.
  4. Series LLC: It is one of the rarest types of LLC which is preferred. It is a unique kind of LLC. In series LLC the parent LLC gives limited accountability safety to its child businesses.

How to Form an LLC

Starting up an LLC is quite easy. Although every state has its principles and steps, on a general basis starting up an LLC is the process of 5 steps. These stapes are as follows:

  1. Selection of the State.
  2. Naming the LLC.
  3. Hire the registered agent.
  4. File the Articles of Organization.
  5. Generate an operating agreement.

Generally, LLC is managed by its members. This is the reason LLC is also known as a member-managed company.

In some cases, the LLC hires a manager for the well-operation of daily tasks. And this type of LLC is known as manager-managed LLC.

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How Does LLC Work

LLC is becoming one of the easiest concepts to start your own business. It is the popular one among all new joiners’ of businesses. Before you start with your LLC you need to know certain facts about how LLC works, or what you will need to start an LLC.

You need to prepare the articles of the organization which will include some information about the future LLC. The thing which you must know is that an LLC does not have any owner. Its owners are termed as members.

This information will include:

  • Name of all the members & managers.
  • Name and address of the registered agent.
  • Company name and address.
  • The layout of the business plan.
  • Purpose of starting-up an LLC.
  • Structured description of your business.
  • One operating agreement is also required.

An operating agreement is the documented proof that all the members of LLC agree and are formulating this LLC altogether. This document is necessary so that there are no future disputes.

Benefits of an LLC

Several benefits come with LLC, however, the benefit associated with LLC is unique with the type of LLC you are operating. Some of the important and common benefits of an LLC are as follows:

  1. Personal Asset Protection: It is the most important feature and the benefit of operating the LLC. This feature states that the owner of the LLC is not responsible to pay any kind of debt or any financial crisis.
  2. Pass-through taxation: The total profit of an LLC directly goes to the owners, so they need to pay the tax according to the percentage amount of the profit share.
  3. Simplicity: LLCs are quite easy to regulate and maintain. There are no or minimum formal role designations assigned to people.
  4. Flexibility: LLC offers flexibility in its policies, rules, and terms & conditions. LLC can be owned by a single member or multiple members. When the LLC is managed by its members only, then it is termed as Member-managed LLC. And if it is managed by the appointed manager, then it is termed as Manager-managed LLC.
  5. Increased Credibility: When you start your business as LLC then it adds trustworthiness and integrity towards your business. It offers more chances to your customers and partners so that they can know your better.
  6. Members can easily avail of business loans: Your start-up LLC helps you in making and maintaining your credit history which increases the line of credit. And if you are seeking a big amount of business loans for the maximum tenure period, then it is also easily accessible with the help of LLC.

Disadvantages of an LLC

Although several benefits cum features are featured and you can easily avail them, just by stating your LLC. But there is nothing which comes with benefits only. There are a few disadvantages as well. These are:

  1. Although the LLC is not a personal asset, the members that are owners are asked to pay the taxes according to their percentage from LLC income. It is regardless of the condition whether you can make that much of profit or not.
  2. All members should also not pay their taxes until the K1 form is dispatched form the LLC.

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