LLC is a common term, but you might find yourself wondering what is an LLC, or, at least to start, what does LLC stand for. LLC stands for Limited Liability Company. The LLC definition is not complex on the surface, but there are a lot of things to be aware of when it comes to knowing what the LLC meaning is. In this article, we will answer the question of what is an LLC, including the way it functions and why someone might want to form one.
What is an LLC
To answer the question of what is an LLC, you have to start with the LLC definition. LLC, as stated above, stands for Limited Liability Company. It is a private limited company, and the LLC is really specific to the United States, though other countries have similar structures for their own business law. LLC companies were first permitted in Wyoming, which passed an LLC authorization law in 1977. The IRS then cosigned the business, ruling that LLCs could be taxed in the same way partnerships are. After that 1988 decision, LLCs skyrocketed in popularity. Now, all US states have some form of LLC laws in place.
An LLC is pretty much a hybrid. It’s a legal formation, with characteristics of a partnership and a corporation or a sole proprietorship and a corporation, with the latter depending on how many owners a company has. An LLC has limited liability, which means that the company’s members aren’t able to be held individually liable for liabilities and/or debts of the company itself. This limited individual liability is the major characteristic that LLCs share with corporations. The trait that they share with partnerships is pass-through taxation, which we’ll get to a little later. When asking what is an LLC, you need to also ask what the goals of such an organization are. Business owners generally choose an LLC for the benefits of this business structure.
The Advantages of an LLC
There are a lot of advantages to an LLC, including taxation, liability, stockholder freedom, and more. First and foremost, an LLC can decide what it wants to be taxed as. It can be an S corporation, C corporation, partnership, or sole proprietorship for tax purposes. Should the LLC decide to be taxed as a partnership and have multiple members, the LLC can allocate, specially, the members’ share of gain, loss, income credit, or deduction of the company. This is something that a C corporation cannot do.
Additionally, an LLC protects its members from individual liability. Otherwise, were something to go wrong and the members each held liable, they would be crippled by lawsuits. Companies cannot grow if members are afraid to take risks, so these liability laws actually serve to strengthen the industry. Thirdly, the shareholders of an LLC are unlimited and there is no restriction forcing them to be citizens, something that S corporations enforce. There is also less administrative paperwork than would be required by a corporation, and in certain states, just one natural person (i.e. not a corporation) can set up an LLC.
What Does an LLC Mean for Income Taxes
For income taxes, the goal behind the question of what is an LLC gets more complex. It becomes more of what is an LLC for tax purposes. The choice to pick what type of entity you are taxed as allows the LLC to avoid what is known as the “double tax.” The double tax is when a business is taxed both on corporate profits and on corporate profits when they are distributed to the members. The double tax is often also referred to as pass-through taxation. With pass-through taxation, profits are taxed simply at the membership level, not at the overall profit level. This saves corporations money and paperwork. What is an LLC for tax purposes? The answer is simple: a money-saver.
Variations on What is an LLC
There are some variations on what is an LLC. There is something called a professional limited liability company, or PLLC, that some states require if you’re going to provide professional services. Doctors, lawyers, engineers, etc. all use this form of LLC in certain states. The requirements vary based on state, but, generally, the rules is that all members have to be professionals of the same industry as the PLLC.
Another variation on what is an LLC is a series LLC. A series LLC allows for segregation of assets. An LLC can divvy up its assets into a separate series of assets. This especially works well for real estate, where you will want your properties to be unaffected by the foreclosure of others. A third variation on what is an LLC is an LC3, which is a social enterprise venture that is for-profit. The goal of the LC3 has to be providing a social benefit, not driving a profit. The fourth variation on what is an LLC is an Anonymous LLC, where the ownership of the LLC is not made publicly available. The ownership names aren’t publicized by the state.
Hopefully, this article has answered your question of what is an LLC, delving into what does LLC mean and how it can benefit business owners who want to gain advantages from this simple business structure.