When considering business entities, LLCs are one of the more popular formation options, and for good reason. Creating an LLC offers tremendous benefits to businesses, and their advantages far outweigh any potential drawbacks. Let’s discover the answer to the question you’re likely asking yourself: What does LLC mean in business?
What is an LLC for?
First, let’s start with the definition—what does LLC mean? A limited liability company (LLC) is a type of business entity that entrepreneurs can create to both own and run their business. When asking what LLC means in business, the most obvious benefit of LLCs (and other business entities) is that they offer protection against personal liability for business debts and obligations, provided everything is formed and operated correctly.
So if you’re questioning what is an LLC is for, this is their ultimate purpose. By running your business with and through an LLC, you may avoid risking your personal finances. To put it another way, this means that your personal assets can’t be touched to pay for debts incurred by your business.
Benefits of an LLC
Another LLC feature that many business owners enjoy is the option for pass-through taxation, providing another good answer to the question of what an LLC is for. When considering an LLC vs. corporation for small business, with a corporation you’re paying taxes twice on the same income: once as corporate taxes and again as personal income taxes on any amounts taken as salary or dividends.
LLCs allow their owners to “pass through” their business earnings to their personal income taxes, without being taxed in the LLC. This avoids having to pay taxes more than once and means paying taxes at the personal income tax rate—which may be lower than the corporate tax rate, but it’s definitely less than paying both corporate and personal taxes. LLCs can instead elect to be taxed as a C corporation or S corporation, which provides options depending on your personal tax situation.
Another example of what does LLC mean in business? LLCs also boast tremendous flexibility when it comes to the ownership and operation of the LLC itself. LLCs can have one owner or many, and can choose to be member-managed, where the respective members of the LLC are responsible for the day-to-day business of running the company. Alternatively, they can designate a member to serve as the manager of the LLC, which is referred to as a manager-managed LLC. It’s also worth mentioning that an LLC can own another LLC.
But if you’re still asking yourself, “LLC, what does it mean?”, the most straightforward answer is that it can be the simplest option for running your business. Not only is it easier to form an LLC over a corporation, but corporations are required to have a board of directors. That board of directors is responsible for appointing officers to run the company, as well as distributing shares, figuring out voting rights, and everything else that comes with a corporation. While an LLC does require the creation of Articles of Organization, there’s no requirement for a board or officers, shares, or the same annual reporting standards of a corporation.
Drawbacks of an LLC
While there are considerable benefits to creating an LLC for your business, there are also some drawbacks. When deciding between a sole proprietorship vs. LLC, there are costs involved in creating an LLC compared to starting your business as a sole proprietorship. However, a sole proprietorship offers none of the liability protection that an LLC or other business entity does. You may also want to look into the difference between LLP and LLC.
There are also fundraising shortcomings related to LLCs. If you want to grow your business through investment, corporations are a far more accessible and attractive option for investors. Corporations are set up to issue stock to investors, and while LLCs can add new ownership members, they’re generally not an option that most investors consider.
What does LLC mean in business?
While investment and cost are very real considerations, not every business wants to make its way onto the Fortune 500—and for those companies comfortable with the possible limitations of an LLC, it’s an unquestioned benefit to have one for your business. You’re making sure your family’s finances are protected from whatever might happen with your company.
Plus, you’re formalizing the partnership between you and any co-founders in a way that helps manage any future conflicts by settling upon organization and roles in a written document from the start. You’re also formalizing your business to the public at large; seeing an LLC next to your company name lends an air of credibility to your venture, even in the early stages.
LegalShield can provide advice on creating an LLC
If you’re thinking about an LLC for your business, let LegalShield help you get started. Other small business questions will inevitably arise and a LegalShield Small Business Plans, starting at only $49 per month, can save you time and money. Sign up today!
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