What Is A Limited Liability Company?

Last updated on: September 20, 2022

A limited liability company (LLC) is an enterprise established by one or more legal entities and/or individuals, the charter capital of which is divided into shares. At the same time, the founders of the company are not liable for its obligations. They bear the risk of losses related to the company’s operations to the extent of the value of their stakes or shares in the charter capital of the company but only as long as the company is not in bankruptcy.

Thus, an LLC is a community of one or more individuals that has a charter capital consisting of the founder shares. With this money, as well as with other assets of an LLC, the company is liable for debts, and this obligation is a joint-and-several liability. In the event of the company’s bankruptcy, the shareholders are liable for the company’s debts with all their assets.

It should be noted that an LLC is intended primarily for small and medium-sized entrepreneurs who do not want to risk all their assets. However, an LLC is also suitable for running a large business.

In the United States, a corporation is the most solid form of organization and business running. Corporations have a separate tax number EIN (Employer Identification Number). This number is assigned to a business entity so that it can easily be identified by the Internal Revenue Service (IRS). 

What Is Limited Liability?

Limited Liability Company (LLC) is an intermediate form between a private enterprise and a corporation. If you are a U.S. citizen who has an SSN number, you can choose to pay taxes for your LLC: as a private company, i.e., for a personal SSN or as a corporation on EIN. If you are a foreigner, you do not have an SSN. That is, you will in any case pay taxes on EIN as a corporation. It follows from this that most of the advantages of LLC do not apply to foreign owners of LLC.

Why form an LLC?

First of all, it’s about the protection of personal property. Say, you have concluded a contract for several million dollars, but after a couple of payments, something went wrong. Another counterparty is suing you, and you are only responsible for the company’s property, protecting your personal account, real estate, car, etc.

The second important point, in certain states, LLC can be called “tax heaven.” As you know, each state in the United States has its own laws, precedents, and tax rules. There are a number of states where there is no regular taxation, which means that it is actually offshore for businesses. Thus, you pay an annual report or tax once a year if you do not have profits from intra-state sources. In simple terms, you can contract with a Chinese company for any services or sales, the money will go into an American account, but you will not have to pay taxes on that profit in the U.S.

This form of running a business is also common among non-residents of the United States.  

LLC Structure

Talking about the structure of an LLC, it’s very simple and sort of like the sole proprietorship (run by one individual with no distinction between the business and the owner). Some entrepreneurs, though, tend to think that an LLC is more like a general partnership. 

A limited liability company, as its name suggests, assumes a limited liability as a C Corporation (any corporation that is taxed separately from its owners. C Corporation is different from S Corporation, which is not usually taxed separately). In addition, it’s applicable to the tax incentives of the partnership. Generally speaking, this form of business activity has quite a lot of flexibility, which concerns both the structure and the conduct of business and its taxation. Flexibility in management and distribution of profits is, of course, very important for the owners of the company.  

An LLC is characterized by the fact that all profits and possible losses are transferred to all participants in the company. This also applies to the owner(s) of the company. Additionally, it’s also mandatory to submit income declarations for all LLC members. The losses of the company are also included in the declaration. This is another similarity of an LLC with a partnership.  

Income tax is also levied, although not in all states. In addition, the registration procedure is a little different from state to state. To get a qualified answer, it’s better to contact an expert CPA in the state.  

LLC Advantages

As for the liability of all company members/owners, in the case of an LLC, it’s directly proportional to the funds invested in the LLC by each of its members. In this respect, an LLC is more loyal to a general partnership. In this form of company ownership, all its members or owners (i.e. private entrepreneurs) are fully responsible for all possible debts of the company. However, it should be noted that employees of both LLCs and corporations can be sued, for example, for damages due to an accident with an employee in the company. 

Also, one of the key advantages of LLCs is the small amount of work documentation, which must be filled in and submitted to the relevant state controlling structures when registering the company.  

As for the filing of income declarations of an organization, there is also a very simplified procedure compared to corporations. It should be submitted to the state tax authorities only once a year. Moreover, it’s extremely important to do it on March 15 (2.5 months after the end of the financial year of the company). If only one person is registered as a founder and owner of a limited liability company, then, in addition to the declaration, it’s also necessary to submit Form 1040 (or 1040-SR) with Annex C. That’s what individual entrepreneurs do. If there are several founders or shareholders of the company, they all submit completed Form 1065, as in the case of a traditional partnership. We do not recommend that you submit all these declarations yourself. Errors in filling them out can be very costly in the long run.  

Another “simplifying factor” for LLC founders is the absence of the need to hold mandatory meetings and prepare protocols. They are only recommended, though not obligatory at all, and are strictly at the discretion of the LLC members. The only thing is that in the event of any changes in the company, it is still recommended to hold the meetings together with data-collection protocols. Another pleasant fact is that the distribution of profits is the responsibility of all members of the LLC. Usually, this is performed only by agreement, considering the personal/work contribution of each member of the LLC. 

The Agreement Necessity

In order to completely exclude any property disputes concerning the distribution of the company’s profits, after its opening, it’s extremely important to conclude appropriate agreements with detailed conditions with all the members. This agreement must also include the following aspects: 

  • peculiarities of profit distribution of the company; 
  • participation of the administration; 
  • liability of each of the company’s participants; 
  • the right to withdraw the capital of the company; 
  • new capital contribution peculiarities to the LLC; 
  • responsibilities of all the participants. 

Sometimes, it’s very difficult to understand all the nuances of the agreement. And it may be too late afterward. As a rule, disputes with society participants do not lead to anything good. In order to avoid possible disagreements, it’s better to consult a lawyer in advance, prepare and sign an agreement with a reliable LLC formation service from the list below. This will help avoid many problems and conflict situations, especially in the case when one of the founders and partners leave the LLC. 

Senior Business Tax Writer, etc
Jean Wilson Murray
(323) 789-5289
Senior Business Tax Writer, etc
Jean Wilson Murray

Entrepreneur, investor, financial commentator

Leave a Review

Your email address will not be published. Required fields are marked *