Limited liability company facts for kids

A Limited Liability Company (LLC) is a popular type of business in the United States. It helps business owners protect their personal money and belongings. An LLC combines good features from two other business types: partnerships and corporations. It offers "limited liability," meaning owners are usually not personally responsible for business debts. It also has "pass-through taxation," which means profits are taxed only once. This makes LLCs very flexible for many kinds of businesses. Some jobs, like doctors or lawyers, might need a special type called a Professional Limited Liability Company (PLLC).

An LLC is a mix of different business structures. It protects its owners from business debts, like a corporation. But it also lets profits be taxed like a partnership, avoiding extra taxes. This makes LLCs a good choice for many businesses, especially those with just one owner.

LLCs use different words than corporations for similar things. When you start an LLC, you "organize" it, not "incorporate" it. The main document is called "articles of organization," not "articles of incorporation." The rules for how the LLC runs are in an "operating agreement." Owners are called "members," not "shareholders." Their ownership is a "membership interest," not "shares of stock."

Usually, an LLC protects owners from business debts. But if owners mix their personal money with the company's money, this protection can sometimes be lost. It's important to keep business and personal finances separate. Owners might also become personally responsible if they take too much money out of the company. This can happen if the company then cannot pay its own debts.

A Brief History of LLCs

The very first state to allow LLCs was Wyoming in 1977. A company called Hamilton Brothers Oil wanted a business structure that offered both protection from debts and tax benefits. They found a way to create this new type of company.

For many years, it was unclear how the U.S. government would tax these new LLCs. In 1988, the Internal Revenue Service (IRS) decided that Wyoming LLCs could be taxed like partnerships. This was a big deal.

After this decision, other states started to create their own LLC laws. By 1996, every state in the U.S. had laws for LLCs. In 1997, the IRS made it even easier. They introduced a "check the box" system. This system lets businesses choose how they want to be taxed.

Why LLCs are Flexible

LLCs have fewer strict rules than traditional corporations. This means owners can create a management style that works best for their business. The rules for how an LLC is run are usually written in its operating agreement.

The Operating Agreement

The operating agreement is a very important document for an LLC. It explains things like who owns what percentage of the company. It also describes how decisions will be made and how profits will be shared. Having a clear operating agreement can help prevent disagreements among owners later on.

Registering Your LLC

Just like corporations, LLCs must register in every state where they do business. Each state has its own rules about what "doing business" means. If an LLC is formed in one state but operates in another, it might need to register as a "foreign LLC" in those other states. This ensures the business follows all local laws.

How LLCs are Taxed

One of the biggest benefits of an LLC is how it's taxed. By default, an LLC is a "pass-through entity." This means the company itself doesn't pay income tax. Instead, the profits and losses "pass through" to the owners.

The owners then report these profits or losses on their personal tax returns. This avoids "double taxation," which happens with corporations. Corporations pay tax on their profits, and then shareholders pay tax again when they receive dividends. With an LLC, you usually only pay tax once.

If an LLC has only one owner, the IRS treats it like the owner's personal business for tax purposes. If it has multiple owners, it's usually taxed like a partnership. However, LLCs can also choose to be taxed like a corporation if that works better for them.

Good Things About LLCs (Advantages)

LLCs offer many benefits for business owners:

• Flexible Taxation: You can choose how your LLC is taxed. This can be like a sole proprietorship, a partnership, or even a corporation.
• Limited Liability: Owners (called members) are protected from most business debts and lawsuits. This means your personal savings are usually safe.
• More Owners Allowed: Unlike some other business types, an LLC can have an unlimited number of members. There are also no rules about where the members must live.
• Less Paperwork: LLCs often have less administrative paperwork and record-keeping than corporations.
• No Double Taxation: Profits are usually taxed only once, at the owner's personal tax rate.
• Separate Entity: In most states, an LLC is seen as a separate entity from its owners.
• Single Owner Possible: You can set up an LLC with just one person.
• Asset Protection: For some investments, like real estate, each property can be owned by a separate LLC. This protects other properties if one has problems.
• Flexible Membership: Individuals, partnerships, or other businesses can be members of an LLC.

Challenges with LLCs (Disadvantages)

While LLCs have many benefits, there are also some challenges:

• Operating Agreement is Key: If an LLC has multiple owners and no operating agreement, problems can arise. State laws for LLCs are not as detailed as those for corporations.
• Harder to Raise Money: It can sometimes be harder to get big investors for an LLC. Investors might prefer the more familiar corporate structure.
• State Taxes: Some states charge a special tax, like a "franchise tax," just for having an LLC. This is a fee for the benefit of limited liability.
• Higher Fees: Renewal fees for LLCs can sometimes be higher than for other business types. Some states also require expensive newspaper publications when forming an LLC.
• Unclear Management: The management structure of an LLC might not always be clear. Owners can use many different titles, making it hard to know who has the authority to make decisions.
• International Recognition: Other countries might treat a U.S. LLC as a corporation for tax purposes. This can happen if that country doesn't have a similar business type.

Different Kinds of LLCs

There are a few special types of LLCs designed for different needs:

Professional LLCs (PLLCs)

A PLLC is for people who provide professional services that require a state license. This includes jobs like doctors, lawyers, accountants, or engineers. PLLCs still offer limited liability, but owners are usually still responsible for their own professional mistakes.

Series LLCs

A series LLC is a special type that lets a single LLC divide its assets into separate "series." For example, if an LLC owns several pieces of real estate, each property can be in its own series. If one property faces a lawsuit, the others are protected.

Low-Profit LLCs (L3Cs)

An L3C is a for-profit business that also has a main goal of doing something good for society. It combines the flexibility of an LLC with the social benefits of a nonprofit organization.

Anonymous LLCs

An anonymous LLC is one where the state does not make the owners' names public. This is possible in states that don't require public disclosure of ownership.

See Also

• Limited liability partnership (LLP)
• Private company limited by shares
• Unlimited company
• Wholly Foreign-Owned Enterprise
• Foreign LLC