There are different types of business, as well as different entities. And there are differences among these different types of business. These differences make some more viable for the type of business one wants to run than for others. One of them is the Limited Liability Company or LLC.
Limited Liability Company
The Limited Liability Company (or LLC) refers to a legally registered company limited by the shares. The discerning trait of an LLC is (as the name suggests) their limited liability. This means that owner(s) (called ‘members’) are not personally liable for the company’s debt or liabilities in this structure. That is, if an LLC were to go bankrupt, for example, the company’s creditors can only make claims against the company and not the owners. If the company’s assets are not enough to satisfy their claims, they cannot go after the members to personally fulfill those claims.
LLC’s can be said to combine the characteristics of a corporation with those of a partnership or sole proprietorship.
Steps to creating a Limited Liability Company
· Choose A Business Name
This sounds easy (not that it isn’t), but it involves doing a rigorous name search to ascertain that there are no other companies already with the same name you’ve chosen. The business name should be unique and should end with an LLC descriptor. E.g., Limited Company, LLC, Liability co, LTD.
You should also check to make sure you are not using words restricted by law in your jurisdiction. (This can vary, so a check is advisable.)
· File the Article Of Organization
The article of organization, also known as the article of association, bears all the relevant information about the Limited Liability company. These include company address, name, and filing agency.
· Draft An LLC Operating Agreement
The LLC operating agreement is a legal document that creates the parameters under which the LLC will be run. It lays out the rights and obligations of each business partner. The LLC operating agreement generally contains the amount invested by each member, how profit will be split among investors, organization structures, i.e., power, roles, responsibilities, the number of members, and tax considerations.
· Obtain Licenses
Tax registration should be done if the company will be involved in any form of commercial activities or working with employees.
· Apply for EIN
Think of the EIN as your business’ SSN. This will allow you to then open accounts in your business’ name. This is a free step and is done through the IRS directly.
An S Corporation – or S-corp or S subchapter – unlike the limited liability company, is not a type of business but a type of tax election. It is not a business entity but an elected tax status. In fact, a limited liability company can be an S-corp. In an S-corp, the tax liability belongs to the owners (who are called shareholders.) For a company to be recognized as an S corporation, it must be in the U.S and must file with the IRS.
Some differences really set a limited liability company and an S corporation apart.
Differences Between S Corp and LLC
- One difference between an S corporation and a limited liability company is in the membership. An LLC can have an unlimited number of members, but S-corps are capped at 100 shareholders. This limit cannot be exceeded.
- Many states do not restrict ownership in a Limited Liability company. Meaning anyone can be a member including, individuals, corporations, foreigners, foreign entities, and other LLCs. S corps, on the other hand, cannot have foreigners as shareholders.
- LLCs’ profits and losses are passed through to their members, who claim them on their tax returns. They must also pay self-employment taxes for all income. Meanwhile, S Corp shareholders may pay less on this tax provided they pay themselves a reasonable salary (this is a requirement).
- An LLC is permitted to have subsidiaries, but an S Corp is not.
- An LLC cannot issue stock, but an S Corp can, albeit only one class of stock.
If you want to see a visual of some differences check out this quick tutorial video I made.
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