When establishing a new business, entrepreneurs and professionals can choose from multiple operating structures, including sole proprietorships, partnerships and corporations. Over the last several decades, limited liability companies (LLP) have grown in popularity and offer unique features relative to the other structures.
Whether you’re running a one-person operation, such as a small accounting business, or a slightly larger business that employs multiple people, understanding the elements of an LLC is important.
Starting an LLC
As explained by the Small Business Chronicle, a limited liability company may be started by one person, multiple people or even by other businesses. The individuals or businesses with ownership in the LLC are referred to as members instead of owners. The members must create an operating agreement. This sets forth terms like how losses or profits from the business shall be shared among the members and identifies the voting rights of each party.
Operational structure and taxes
A limited liability company is not rigidly associated with a particular tax status. In addition to selecting the LLC model for operational purposes, the members must decide how they would like the business to be taxed. According to NerdWallet, many LLCs opt for the pass-through taxation model that eliminates the need for the company to pay income taxes. Business profits or losses are reported on the personal income tax returns of each member instead.
LLC management requirements
Some entrepreneurs appreciate the management requirements associated with an LLC as they may be less consuming than those associated with a traditional corporation. An LLC may also offer greater flexibility to the members.