Learn more about an LLC's pros, cons, and how to form one, along with its other nuances.
Among the different business structures available, such as S Corp and C Corp, the limited liability company (LLC) remains the most popular. Most business owners prefer LLCs because of the tax benefits and liability protections attached to them.
Still, various states have different rules regarding the formation and operation of LLCs. Plus, some types of businesses, such as insurance firms and banks, may not qualify as LLCs.
In this post, learn the pros and cons of forming an LLC, whether a holding company or a single-member LLC. You will also discover how board portal software helps boards of directors effectively govern LLCs.
What is a Limited Liability Company?
A limited liability company is a hybrid business entity that provides owners (also known as members) with the limited liability of a corporation and tax benefits of a partnership.
The limited liability offered by an LLC provides LLC members with liability protections from business debts or claims. On the other hand, the tax benefits allow profits from the business to be passed directly to owners and filed through their personal income, avoiding the double taxation corporations experience.
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Advantages of Limited Liability Companies
The hybrid structure of an LLC provides business owners with numerous benefits. The advantages of an LLC include:
- Personal liability protection: Owners’ or members’ personal assets are protected from debts and claims against the business.
- Tax options: An LLC is regarded as a pass-through entity by the IRS. Pass-through entities provide owners with pass-through taxation benefits that allow business profits and losses to be taxed from owners’ personal income, which comes with various pass-through tax deductions.
- Easy startup: Setting up an LLC is simple since it doesn’t require officers, shareholders, or director meetings. The only requirement to form an LLC is filing a formation document, which contains an article of organization.
- Few ownership restrictions: There is no cap on the maximum or minimum number and type of owners an LLC can have. It could be one, two, or hundreds of owners, and comprise individuals, foreign entities, or corporations.
Disadvantages of a Limited Liability Company
Generally, it costs more to register and form an operational LLC than a partnership or corporation, depending on your state. Examples of charges you may incur when forming an LLC include filing fees, annual fees, and taxes. You may also incur costs to adopt an LLC operating policy if you chose to adopt one.
Apart from high costs, it’s also more complicated to transfer ownership shares or interests to an investor than it is for companies with regular stock and bonds.
How to Start a Limited Liability Company
Although the requirements for forming an LLC vary from state to state, the process usually follows this general sequence:
1. Select Business Name and Address
A business name and address are the first items needed to start a limited liability company. The name needs to be unique and not in use by another business within your state, while the address must be for a physical location, even if it’s your home office address.
2. Acquire Formation Document From the State
The next step is to get a formation document from your Secretary of State’s office. The documents inside a formation vary by state, but they generally include an article of organization, a resolution, and an agreement.
3. Complete the Formation Document and File With the State
Lastly, you must fill out all the forms needed to form an LLC and file them with the responsible agency for processing. Ensure you include details about a registered agent, who will be in charge of receiving official documents on behalf of your business. Once the appropriate fees are paid, the company ownership of the LLC transfers to you, and you can start trading.
Limited Liability Company vs. Partnership
The first difference between a limited liability company and a partnership is that an LLC’s business assets are separate from the owner’s personal assets, while in a partnership, owners are liable.
Secondly, an LLC can be owned by a single individual, while a partnership requires two or more people to form. Thirdly, creating a partnership requires filing a partnership agreement, while forming an LLC requires filing an official formation document. And lastly, an LLC can take over a partnership and make it its subsidiary company.
Do Limited Liability Companies Need a Board of Directors?
No law requires LLCs to have a board of directors. However, forming a board with board term limits helps your LLC have a more organized business structure. Boards also provide governance and oversight of the company’s operations.
OnBoard Powers Effective Boards
A limited liability company is a strong business structure that provides owners or members with several benefits.
If you’re looking to form an LLC, consider forming a board. Board directors are crucial for keeping LLC operations in check as they provide oversight and governance. Our OnBoard management software can help manage your corporate board secretary’s duties, streamline board operations, and maximize meetings. The main areas OnBoard excels at are:
- Improving communication and collaboration
- Improving board meeting productivity
- Providing real-time information on company financial health and performance
- Recording real-time minutes, sharing them with stakeholders and updating them as required
- Ensuring board compliance with corporate governing regulations
Get more information on the OnBoard software from our Board Management Software Buyer’s Guide. It details everything from the software features to the price to help you make an informed choice.
Frequently Asked Questions (FAQ)
What are the Risks of a Limited Liability Company?
An LLC can lose its limited liability when a company fails to follow state regulations, separate business from personal assets, or maintain proper records. That means owners' personal assets may be liable during litigation.
What Types of Business are Best for a Limited Liability Company?
Businesses most suited to becoming LLCs are medium- and high-risk businesses. Apart from that, owners with vast assets can also form LLCs to protect their assets from liability in case of risk and pay lower tax rates than with a corporation.
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About The Author
- Josh Palmer serves as OnBoard's Head of Content. An experienced content creator, his previous roles have spanned numerous industries including B2C and B2B home improvement, healthcare, and software-as-a-service (SaaS). An Indianapolis native and graduate of Indiana University, Palmer currently resides in Fishers, Ind.
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