LLC Basics and Tax Advantages
An LLC, or Limited Liability Company, protects owners, known as members, with limited liability for personal assets against business debts and lawsuits. This means if the business is sued or incurs debt, members’ personal assets typically can’t be used to cover these liabilities. Most new owners choose LLCs to benefit from the disregarded entity tax status, where the company is not taxed separately but instead, the taxes are passed through to the individual owner’s tax return, functioning more like a sole proprietorship or partnership than a corporation. This structure simplifies the tax filing process and avoids the double taxation often seen in C Corporations.
Management and Ownership
Member-Managed LLCs
Many LLCs are member-managed, which means that the owners themselves are involved in the day-to-day operations of the business. This allows for a flexible management structure and is often favorable for single-member LLCs, which are treated as disregarded entities for tax purposes. Income and expenses from the LLC are reported directly on the member’s individual tax return.
Manager-Managed LLCs
Meanwhile, some LLCs choose to be managed by appointed managers rather than by their members. This might be more common in larger LLCs, where the owners prefer to have a management team handle the operations. Regardless of the size, an LLC typically requires a clear management body to make business decisions, which may include roles like a general director or chief accountant.
Leadership Hierarchy within an LLC
The hierarchy of an LLC can vary based on the company’s operating agreement and its size. Small LLCs may only need a few members or managers to govern, while larger LLCs may require a more complex management structure with multiple managers or directors. The operating agreement is a key document that outlines the specifics of management and the distribution of profits and losses among members.