September 23, 2020

What Is an LLC and How Does It Work Exactly?

From the California Business Journal  Newswire.

Are you planning to put up a business? Are you wondering which form of business structure offers many key advantages?

Then a limited liability company or LLC may be the perfect business structure that you want. But what is an LLC and how does it work exactly?

Though the LLC structure started back in the late 1970s, it was only recently when it began to experience a boom. It showcases some of the best features that make up corporations and partnerships.

This gives you more flexibility in how you own and manage your business.

But what does an LLD do exactly? What are the requirements for putting up an LLC? Continue reading below for the straight answers.

What Is an LLC and How Does It Work?

What is an LLC and how does it work? In deciding what’s best for your business, the structure that you will use to run it is paramount. And LLC fits the bill, being a legal form of business entity.

But what makes the LLC structure different from the rest? What does an LLC do?

An LLC picks out some of the best elements of partnerships and corporations. In turn, it gives you key advantages, the same limited liability as corporations have. This limited liability pertains to those involving business debts.

This means the law cannot force you to use your personal assets to pay any debts that your business will incur. Hence, your car, house, and personal bank accounts are not subject to attachment as far as paying for the business debts go.

This feature is not available in sole proprietorship or general partnership.

Can Anyone Form an LLC?

Who can you form an LLC? Can you do it alone or do you need others to participate in the process? The answers vary depending on which state you are putting up your business.

Though you can use an LLC to run almost any form of business, certain states require specific professionals to form LLCs.

But to establish an LLC, you must first come up with the articles of organization. This includes the names of all owners; and the names of all managers. It also covers the name and address of the registered agent.

Additionally, the articles of the organization should also indicate the company name and address. It should also come with a business plan, as well as the purpose and structure of your business.

Thus, you can form an LLC regardless of the size of your business. You can also build one alone or with other co-owners.

The LLC Structure

Another important detail to discuss before putting up an LLC is the structure. Two main structures classify an LLC: the ownership structure and the management structure.

In an ownership structure, the law calls the LLC owner as a “member.” This is similar to a stockholder in a company. If you are the sole member, then your business is a single-member LLC.

If there are two or more members, the classification is multi-member LLC. All members will share in both the profits and losses of the company. For example, if there are two of you who established the LLC and invest 50% each, then both of you will get 50% of the profits.

When it comes to voting powers, the weight of the votes depends on the amounts of the members’ capital investments. If you invested 50% while one partner only invested 25%, your vote will count twice as much as his.

As for the management structure, it is a group of managers that will oversee the LLCs day-to-day operations. These managers are somewhat like the officers in a traditional corporate setup.

Furthermore, the members of the LLC can also double as managers. Hence, the law calls the company a member-managed LLC.

Regardless of the structure you choose, it is the members who make the major decisions. This applies whether they are also managers or not.

As for the managers, their scope only covers the company’s day-to-day operations.

LLC and Its Key Benefits

There are many benefits to establishing an LLC. First is the protection of your personal assets. As we mentioned earlier, you will not be personally liable for the debts and lawsuits your LLC may face.

Hence, creditors cannot take your personal assets to pay off the LLC’s debts.

Another key benefit is flexibility. With an LLC, there is no cap to the number of owners or members. And if there are many members, they can all share the responsibilities of running the day-to-day affairs of the company.

Also, you have the flexibility to choose the way the government can tax your company. We will discuss LLC and taxation in detail later down below.

Last but not least, LLC is simple. It doesn’t require any board of directors and officers. You can run your business without the need to call any shareholder meetings. And in case things become too much to handle, you can share the administrative load with the other members.

LLC and Taxation

Another important area to discuss is taxation. How should you pay your income tax? As we mentioned earlier, you can choose how you want the government to tax your LLC.

Though most LLC owners choose to pay taxes as sole proprietors or as partners, multi-member and SMLLCs can choose to pay taxes the same way traditional corporations do.

You may also qualify for a special pass-through tax deduction. This is a deduction from your LLC’s income tax. The amount can go as high as 20% of your net income business.

The caveat is that the income that you earned must be from your pass-through business. Check this guide here for a more detailed breakdown of taxation of LLCs.

Expand Your Business Knowledge

Now that you know the answer to the question “what is an LLC and how does it work,” you can review your options and determine if it is the best structure to adopt. But establishing a company is only the first step. There are many more lessons to learn along the way.

We invite you to expand your knowledge of running a business. Check out our other articles to learn more about the ins and outs of managing a company.

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