What is a Limited Liability Company (LLC)?

 Posted on December 06, 2022 in Estate Planning

You may be wondering what an LLC is. Well, an LLC is short for Limited Liability Company.  

LLC is the common business structure for private companies in the US that protects its’ owners from personal responsibilities from debts or liabilities.  

Typically, any budding company, small business, or even a tech startup can emerge as an LLC. Microsoft, Nike, Adidas, Berkshire Hathaway, and AOL are all LLCs. 

In this post, you will get to fully understand what an LLC is, its advantages and limitations, and how you can set up a limited liability company. Read on. 

What is an LLC?

As mentioned at the beginning of this post, LLC is short for Limited Liability Company. It is a common business structure that forms many private companies in America. LLC is a business structure that combines the best features of partnerships, sole proprietorships, and corporations, hence, making it a hybrid business entity. 

As a hybrid type of business entity, the owners of an LLC business are called “members". All members are entitled to enjoy the legal advantages that an LLC has to offer.  Some of these are granting liability protection to its members, flexible managerial activities, easy to set up and less paperwork, and enjoying a certain tax advantage known as pass-through taxation.

An LLC is quite different from a corporation as it exists as a separate entity from its members. This is what protects members from being responsible for liabilities or debts.

Members of an LLC can be individual business owners, several partners, or other LLCs.

Types of LLCs.

Setting up an LLC requires you to get the right information on what type of LLC you would like to have. It is recommended that you consult a business attorney who is familiar with the laws of the state of Illinois, business-wise where you are planning to set up your LLC. 

Single business owners, partners, or a group of business-minded people can form an LLC in their desired state. But here are a few common types of LLCs you should know. Three types of LLCs are only available in specific states in the US. They are: 

• Series LLCs (Available in Delaware, Nevada, Iowa, Illinois, Tennessee, Oklahoma, Utah, and Texas only).

• Restricted LLCs (which are only available in Nevada).

• Anonymous LLCs (which is only available in New Mexico).

Having said that, let us get to the know types of LLCs in the US. 

1. Single-member LLCs.

Many small business owners looking to grow into a company, or a startup can decide to start and register with a single-member LLC. It is the most common type in the US, and it is recognized in all fifty states of the country. 

A single-member LLC has just the individual owner and the Internal Revenue Service recognizes such as a sole proprietorship for tax purposes. 

This type of LLC is ideal for solopreneurs

2. Multiple-member LLCs.

Just like the name has given, this type of LLC has multiple members or owners and is quite like partnerships. In this type of LLC, each of the members has debts and tax responsibilities of the company. However, they (members) must sort each tax responsibility from their share of profits made from the business. In the case of debts, members are personally liable, and creditors of any kind will not have access to personal assets. 

3. Member-managed LLCs.

A member-managed LLC has its members as the management team of the company. And as owners, they sit down together to make decisions for the company. Member-managed LLCs are common for large companies in the US. 

Member-managed LLCs have other members in the managerial system. 

4. Manager-managed LLCs.

This can also be the managerial and business structure for a large company setup. In this type of LLC, the members or owners decide on who is appointed as manager. 

In a manager-managed LLC, the manager appointed by selection has legal rights to make company or business decisions without other members' approval. In other words, the manager is the legal agent of the company. 

However, other members have decision rights. For example, they can decide to set up other company branches across the country or even decide to dissolve the company. 

5. Professional LLCs.

Legal firms, accounting firms, health consulting firms, would you use PLLC to show that they are a licensed "professional" company. PLLC is the typical business structure for lawyers, doctors, accountants, engineers, etc.

PLLCs ensure that members are not legally responsible for the malpractice of other members.

Advantages and Disadvantages of an LLC.

Aspiring business owners would prefer to establish a company as an LLC because of its advantageous features such as liability protection and pass-through taxation. However, with all its benefits, LLCs also have disadvantages. In this section, we will discuss the advantages and limitations of an LLC.

Advantages.

1. Limited Liability/Asset Protection

LLCs will provide members or owners with limited liability or asset protection. This means that if your company ever runs into debt, goes bankrupt, or has other financial crises, your assets are off-limit and protected. You have no liability.

For example, if your company ever goes into debt with a creditor, the credit company does not come running after your assets like your individual, investment, bank accounts, etc, through a lawsuit. Instead, they are limited to collecting from your LLC's assets.

2. Flexibility in Taxation.

As mentioned earlier, LLCs have the legal advantage of choosing the best features of a sole proprietorship, partnership, or corporation. This comes to play in your LLC taxation bill. 

For a lower tax advantage, you can choose to be taxed as a corporation by filing an election with the Internal Revenue Service IRS. LLCs such as single-member LLCs have the advantage of being taxed as if they were an S Corporation or C Corporation.

In addition, tax can be modified to suit the company and its members.

3. Pass-through Taxation.

Why people will opt-in for LLC is the pass-through taxation advantage. The profit or losses incurred by the business goes directly to the members. This way, your members avoid being taxed by the government on the company level, taxed directly on their income, and avoid double taxation for both company and owners.

4. Flexible Managerial Option.

Members of LLCs have flexible options when it comes to their company management. This is one of the advantages of an LLC. Members can share responsibility; i e, the LLC can be a member-managed LLC or select a management team to take responsibility for company activities—manager-managed LLC. The management team in an LLC could consist of members and non-members.

5. Credibility. 

As a business, when your company is registered as an LLC, you are established as an authority in the minds of your potential clients. In other words, an LLC assures your clients that you are a bona fide business with a business name that resonates with them.

Disadvantages.

1. Cost

One common disadvantage of an LLC is set-up costs. In Illinois, LLCs are less expensive to set-up than corporations.

Annual tax fees of an LLC start from $150. 

2. Investment Disadvantages.

Investors would invest their money in large corporations rather than an LLC. LLCs are flexible and give investors multiple options to benefit from a small business investment unlike a corporation.

3. Consequences Members Turnover.

When a member decides to leave the business, goes bankrupt, or the unthinkable happens to a member, other members will have to bear the responsibility of terminating the business. And, of course, if they would like to continue, they will have to establish an LLC from the beginning all over again. 

Setting up an LLC (Illinois Guide).

One reason people choose LLC over a corporation is an easy setup. Although, the cost of setting up an LLC may vary. In Illinois, for example, you will only need to perform five activities to get your LLC up and running.  They are:

• Choose a Name for Your LLC.

Like every other business owner looking to set up a company, it is essential to choose a business name— a name that is identifiable and different from other businesses registered with the Illinois Secretary of State. It is advisable to check if your desired business name is available on the Illinois Secretary of State Business Services Database. 

In Illinois, Choosing and reserving a name for your LLC requires you to file an Application to Reserve a Name Form LLC-1.15. It costs $25. As required by law, your business name must be suffixed with LLC or Limited Liability Company. 

Note that company abbreviations like "Ltd.", "Co.", "Inc." or "Corp." are not allowed in forming an LLC. 

• Appoint a Registered Agent

It is required by state law that LLCs must have a registered agent for service of process. 

A registered agent could be an individual; a member of your LLC, or another business entity who agrees to stand as a correspondent and take legal procedures on behalf of your company. 

An appointed registered agent must be an individual who resides in or a company that runs in the state where your LLC is. Also, the registered agent must have a physical address.

Your state may have a list of recognized third-party agent services. 

• File Articles of Organization With the Secretary of State.

Filing Articles of Organization with the Secretary of State is required in setting up an LLC. In Illinois, this step brings your company to existence; legally. The Articles of Organization consist of basic information about your company, as in structure. It includes the LLCs name, address of the LLC's principal business place, and management type.

In Illinois, filing costs $150 and can be filed by mail or online. We prefer online.

• Prepare an LLC Operating Agreement.

Although not required in many states, it is however recommended to create an operating agreement which is an internal document that contains how your LLC is to be run, and the rules to be followed by members. 

An operating agreement will prevent future court cases in the cause of anything. For example, in resolving disputes; the operating agreement already explains that from the beginning.

• Obtain an Employer Identification Number (EIN).

As required by state law, you must obtain an IRS EIN if your LLC has more than one member. If you have a one-member LLC, you are still required to obtain an EIN for when you will get employees or when you elect to tax your LLC as a corporation. 

EIN can be obtained from the IRS website. 

Is an attorney required when setting up an LLC?

An attorney is not required whenever you want to set up an LLC. But it is recommended for first-time LLC founders and business novices to consult the services of a sound business attorney. The benefit of an experienced business attorney is their knowledge and understanding of the common mistakes that entrepreneurs made. A wise business owner learns from other’s mistakes without repeating their mistakes.

Documents like Operating Agreements, Articles of Organization, and the whole procedure might seem overwhelming. Therefore, Gateville Law Firm is here to help you ease your LLC set-up. We are here to further simplify and familiarize you with the process of a smooth and recognizable LLC. Contact us today at 630-780-1034 or via the online form.