Limited Liability Companies (LLCs)
What is a Limited Liability Company?
A limited liability company (LLC) is a type of business entity that is used primarily for liability protection, asset protection, and in some cases tax reduction.
How is an LLC Set Up?
An LLC is a company that is created by filing articles with the secretary of state. Most states allows this filing online, but some states require you to mail your articles to the state for filing. The filing process can be instantaneous or can take 6-8 weeks depending on the state.
Who owns and operates an LLC?
An LLC is owned by Members who are liken to Stockholders of a Corporation. LLCs are run by Member-Managers, or Managers. Member-Manager is a special designation given to an owner who also actively manages an LLC. Non-Member Managers (Managers) are individuals or entities (Corporations or other LLCs) that actively manage LLCs for the Members, but are not members themselves.
How are LLCs treated from a tax perspective?
An LLCs taxation depends on either the number of Members it has, or the elected taxation type (if the Members have made a tax election filing with the IRS). If an LLC has only one Member and they have not made a tax election filing, the LLC would be treated as a Sole Proprietorship from a taxation standpoint (form Schedule C). If an LLC has two or more Members and they have not made a tax election filing, the LLC would be treated as a Partnership from a taxation standpoint (form 1065). Additionally, an LLC can also be "S" elected or "C" elected.
LLC Taxed as a Sole Proprietor (Schedule C)
LLC Taxed as a Partnership (Form 1065)
LLC Taxed with an "S" Election
LLC Taxed with a "C" Election
Who would benefit from an LLC?
Protection for YOU from high liability activities:
If you are engaged in business activities that are high liability, operating out of an LLC can shield you personally from that liability. For example, a business coach who operates their business with an LLC is sued by one of their clients. If the client wins the lawsuit, the client will only have the ability to take the assets directly owned by the LLC, and not the business owner. This means that all of the business coaches personal assets are safe from the lawsuit, which includes: residence, bank accounts, cars, stocks, jewelry etc. *The rules are different for a licensed professional, and you can read more about licensed professionals here. This is called personal liability protection.
Protection for YOU from your dangerous assets:
If you have dangerous assets, which are assets that can bring a lawsuit to you - things like real estate, dangerous machinery or heavy equipment, business vehicles, boats, etc., then you may need protection from that asset. For example, a real estate investor uses an LLC to hold their rental property. If one of the tenants sues the owner of the property and the owner of the property is an LLC, then even if the tenant wins the lawsuit they will only have the ability to take assets that are directly owned by the LLC. This means that all of your personal assets will be protected from the lawsuit. This is called dangerous asset liability protection.
Protection for the ASSET from your actions:
What happens to business or investment assets if you are sued personally? If you have high value business assets that you own personally and you are sued personally (nothing business related), then the assets will be subject to seizure if you lose the lawsuit (and you are not covered by insurance). If you have high value business assets that are owned by an LLC (and meet certain requirements) and you are sued personally (nothing business related), then your business assets will be protected by a remedy called a Charging Order.
Charging Order Protection (potentially):
The charging order is a judicial remedy used by creditors to seize any distributed profits meant for a member of an LLC that has a judgement against them. This means that if a member of an LLC was sued personally (nothing business related) and lost the lawsuit, the creditor would not be able to seize any assets that where owned by the LLC. Instead, the creditor would only be entitled to profits that were intended to be distributed by the LLC to the member with the judgement.
Provides Additional Asset Protection:
There are additional tax strategies that can be utilized with an LLC.