Part III: Limited Liability Corporation
“Simplest form of incorporation”
After soft-circling it for 3 posts, we are finally here! A limited liability corporation (or LLC as it is commonly known) is the simplest formalized structure; it finally relieves the general partner/s of their responsibility to cover the liabilities (debts/taxes) of the corporate entity. More plainly, your personal assets are protected.
As this post will show, a limited liability corporation is a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.
Owners of an LLC are called “members,” and depending on the state in which you incorporate, the members can consist of a single individual (one owner), multiple individuals, corporations or other LLCs. Ownership can then be broken down into classes (Preferred, Class A, Class B…), where different classes of investors have different rights with respect to governance and decision-making.
The most defining feature of a limited liability corporation is how it affects taxes of the owners. Unlike shareholders in a corporation, LLCs are not taxed as a separate business entity. Instead, all profits and losses are "passed through" the business to each member of the LLC. Members report profits and losses on their personal federal tax returns, just like the owners of a partnership would. LLC attract angel investors as it is beneficial for their tax efficiency, but generally incompatible with venture capital investment. That means if you have a capital intensive product startup, an LLC is not for you.
Another disadvantage of an LLC is that members are considered self-employed. As such, they must pay the self-employment tax contributions towards Medicaid and Social Security. The entire net income of this LLC is subject to this tax. For more information on relevant tax filings see the IRS Guide.
Thanks for reading! LLC owners following along should not be afraid to reach out to me if you're looking for financial assistance. My personal email is firstname.lastname@example.org and I'll be happy to answer any/all questions.
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If Limited Liability Corporation isn't the right structure for your startup, check in next week for S Corporations.