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What is an LLC? (and What Does it Mean)?

october 25, 2021 | small business
Entrepreneur considering an LLC business formation

When considering business entities, LLCs are one of the more popular choices from among the formation options, and for good reason. LLCs offer tremendous benefits to those who choose to create one for their business, and while they aren't without their potential drawbacks, those disadvantages aren’t necessarily a deterrent for many, and are outweighed by the positives. 

What is an LLC?

A limited liability company (LLC) is a type of business entity that entrepreneurs can create to both own and run their 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. By running your business with and through an LLC, you may avoid risking your personal finances.

Benefits of an LLC

Another LLC feature that many business owners enjoy is the option for pass-through taxation. 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 is 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.

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, or they can designate a member to serve as the manager of the LLC, which is referred to as a manager-managed LLC.  

Choosing an LLC over a corporation also makes for a simpler process in setting up the entity itself and the related organization. Corporations are required to have a board of directors, and that board of directors is responsible for appointing officers to run the company, as well as distributing shares and figuring out voting rights and everything else that comes with a corporation. And while an LLC does require the creation of Articles of Organization, there’s no requirement for a board or officers or shares, or the same annual reporting standards of a corporation.

Drawbacks of an LLC

As previously noted, while there are considerable benefits to creating an LLC for your business, there are some drawbacks as well. There are costs involved in creating an LLC as opposed to starting your business as a sole proprietorship, although it should be noted that sole proprietorships offer none of the liability protection that LLCs or other business entities do.

There’s also the LLC’s shortcomings with respect to fundraising as compared to corporations. If you’re looking to grow your business through investment, corporations are a far easier and more attractive option to 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, it’s not always the case that every business is looking 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.

Create an LLC with LegalShield

If you’re thinking about an LLC for your business, let LegalShield help you get started. Launch by LegalShield takes you through all the steps of creating an LLC and gives you additional legal support afterward for all of the other questions that will inevitably arise, all for the initial fee of $145. Sign up today!

Pre-Paid Legal Services, Inc. d/b/a LegalShield (“LegalShield”) provides access to legal services offered by a network of provider law firms to LegalShield members through membership-based participation. Specific limitations apply. See a plan contract for specific state of residence for complete terms, coverage, amounts, and conditions. The benefits described, including trial defense, are not available in all legal plans or in all states. Neither LegalShield nor its officers, employees or sales associates directly or indirectly provide legal services, representation, or legal advice (business consulting or business advice). This is meant to provide general information and is not intended to provide legal advice, render an opinion, or provide any specific recommendations. If you are a LegalShield member, please contact your provider law firm for legal advice or assistance.

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