If you’re a part of my “All Up In Yo’ Business” community, hearing me discuss LLCs is nothing new.
But one thing we haven’t covered yet is really one of the most basic questions: what exactly is an LLC?
What does “LLC” mean?
“LLC” stands for “limited liability company.” The “limited liability” part means the LLC’s owners (which are called the “members”) are not personally responsible for the debt and liabilities of the LLC. If the LLC is sued, the members do not risk losing their own assets in the lawsuit. To say it simply, LLCs are a form of protection from liability.
An LLC is a business entity that is recognized and formed at the state level, under state statutes. In other words, it is the STATE, not the federal government, that you’ll deal with to form and maintain your LLC. And the laws of the state where the LLC is formed will govern the LLC’s operations.
For my “All Up In Yo’ Business” community, this is why when you reach out for help for your LLC that’s been formed outside of Colorado, I advise finding an attorney in your state. I can give you general advice to help BUT I do have an online tool that I’ve partnered with to help you file your LLC on your own: https://linc.180lawco.com/product-selection-formation.
LLC: A Brief History
LLCs are relatively new creations. The LLC was actually invented in 1977 by the state of Wyoming (according to Wikipedia). Prior to, most businesses were either corporations (owned by shareholders, managed by directors, and separate corporate taxation), or partnerships (partners manage and are personally liable for the business, but no corporate tax). Businesses, apparently, were clamoring for a way to combine the two—they wanted the management and tax ease of the partnership AND the liability protection of the corporation. Eventually, the IRS got on board too, and all the other states jumped on the bandwagon and passed laws permitting LLCs.
Compared to a corporation, an LLC is a very simple business structure. The structure of an LLC can be very flexible and (in most states) there are minimal compliance requirements to keep an LLC in good standing.
How are they formed?
LLCs are formed by filing a document, usually called Articles of Organization or Certificate of Formation, with the Secretary of State’s office.
How are they owned?
LLCs can be owned by one person/member (single-member LLC), or two or more people (multi-member LLC). Members can by individuals or they can be other LLCs, corporations, trusts, or really any other kind of entity (subject to state law), and they don’t have to be US citizens or permanent residents of the US.
How are they managed?
LLCs can be run and managed by the members themselves (member-managed) or by managers elected by the members (manager-managed). In a member-managed LLC, the members are agents of the LLC; they can act on behalf of the LLC and enter into legally-binding agreements on the LLC’s behalf. In a manager-managed LLC, only the managers are authorized to bind and act on the LLC’s behalf. Managers will typically make the majority of day-to-day decisions, while the members will get to vote on major decisions affecting the LLC. Managers can be members or non-members.
But, LLC management can be very flexible and customizable. For example, LLCs can also be structured more like corporations, with a managing board or a “board of directors” that votes on major decisions.
How are they taxed?
Confusion often comes up when we start talking about taxes. In the state’s eyes, the LLC is separate and distinct from its members. But in the IRS’s eyes, the LLC essentially does not exist. LLCs are “pass-through” entities, meaning the profits and losses pass through to its members. LLC members report their share of the LLC’s profits and losses on their individual tax returns, and the LLC does not have its own corporate tax return and doesn’t pay its own corporate tax.
A single-member LLC is treated as if all of the LLC’s income is income to the member. With multi-member LLCs, the profits and losses allocated to the members, usually in proportion to their ownership interest in the LLC (the LLC’s operating agreement can provide for different allocations, though). For example, if there are two members who each own 50%, the profits and losses would be allocated 50% to each member.
That’s how LLCs are taxed by default, however, they can elect to be taxed in different ways, such as a C Corporation or S Corporation.
To summarize and wrap it all up, a few advantages of an LLC:
Personal liability protection
Pass-through entity taxation
Relatively easy & inexpensive to form, and very customizable
Makes you look more “legit”
Pass-through taxation (depending on the situation, sometimes the people involved DON’T want this taxation)
Not great for investors (can’t issue shares of a stock like a corporation)
Self-employment tax. Even though there’s no double taxation like a corp, the income is subject to self-employment taxes.
The LLC is a very popular entity for small businesses. But, it’s not the best fit for every business. That’s why it is always a good idea to consult with an attorney who is licensed in your state to determine if the LLC is the right choice for you.
If you are interested in forming an LLC in Colorado, send us a message or schedule a Discovery Call now to get started!
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