What Does LLC Stand For?
Limited liability company. It’s a business structure that is highly flexible and often chosen for its tax structure.
What is an LLC?
A limited liability company, or LLC, takes the form of a private limited company and is a business structure that can combine a partnership, sole proprietorship or even parts of corporations into one business entity.
Benefits of an LLC
- An LLC provides it owner or owners with limited liability. This means that the owner(s) of an LLC are generally not personally responsible for debts that are incurred by the business or by most business-related lawsuits. Since owners are usually not personally responsible, creditors or those who file lawsuits against the LLC cannot collect the personal assets of the owner such as personal bank accounts, personal vehicles, or the individuals home.
- Ordinarily, LLCs provide their owners with pass-through taxation which allows the profits or losses incurred by the business to pass directly to the owner’s personal tax return. When this is done, profits are taxed at the owner’s personal tax rates. Single-member LLCs (SMLLCs) are usually taxed the same as sole proprietorships. When an LLC has two or more members, it is typically treated like a partnership for tax purposes. Under the Tax Cuts and Jobs Act, which took effect in 2018, an income tax deduction of up to 20% of the net business income earned by pass-through entities is available.
- Unlike the burdens that are associated with forming and running a corporation, an LLC is the simplest business entity to form and operate.
- There is no requirement or limitation to the number of owners (members) an LLC can have.
- LLCs also have the flexibility to choose how they want to be taxed. Although the majority of LLCs are taxed as sole proprietorships or partnerships, SMLLCs and multi-member LLCs have the option to be taxed like a corporation. If this is desired, a document which is called an election would need to be filled out with the IRS. From there, the LLC can choose to be taxed as a C corporation or S corporation. Either way, the owners work as employees of the corporation, however, C corporations are taxed at 21% while S corporations are treated as pass-through entities. Being a pass-through entity, the tax treatment for S corporations can result in tax savings.
- The formation of an LLC provides customers with comfort and reassurance, as they know the business is legitimate. This comfort and reassurance helps to promote the company and provide it with credibility.
How to Form an LLC in Texas
- Choose a name for the LLC. Under Texas law, the name of an LLC must contain the words “Limited Liability Company,” “Limited Company,” or the abbreviations “L.L.C.,” “LLC,” “LC,” or “L.C.” The word “Limited” may be abbreviated as “Ltd.” or “LTD” and “Company” as “Co.” A name can be reserved for 120 days by filing an “Application for Reservation or Renewal of Reservation of an Entity Name” (Form 501) with the Texas Secretary of State.
- Appoint a registered agent. The registered agent serves as the individual who agrees to accept legal papers on the LLCs behalf if it is sued. The LLC may not be its own registered agent; however, the registered agent must have a physical street address in Texas. Oxner Legha is the registered agent for many businesses in Texas and can provide this service at a competitive rate.
- File a Certificate of Formation. An LLC is initially created by filing a “Certificate of Formation for a Limited Liability Company” (Form 205) with the Secretary of State.
- Prepare an Operating Agreement. In Texas, an operating agreement is not required, however, many highly advise it. The purpose of this document is to detail how the LLC will be run. This agreement is not filed with the state; it sets out the rights and responsibilities of the members and mangers of the LLC, including how it will be managed.
- Obtain an EIN. This applies to LLCs that will have more than one member. If this is the case, an IRS “Employer Identification Number (EIN) must be obtained. The document applies to even LLCs that do not have any employees. If a one-member LLC is formed, an EIN must be obtained only if it will have employees or if it is going to be taxed as a corporation rather than a sole proprietorship.
- Annual Reports. Texas does not require LLCs to file annual reports with the Secretary of State, however, LLCs must file annual franchise tax reports.