What is a Limited Liability Company (LLC)?

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Definition:

A limited liability company (LLC) is a business entity that provides a business owner with the tax benefits of a partnership or sole proprietorship, and the limited liability of a corporation.

🤔 Understanding a limited liability company

A limited liability company (LLC) is one of the ways a small business can be organized to help keep personal and business assets separate. Just like the name suggests, an LLC limits your personal liability and protects you in situations related to company debts or legal issues. It also provides popular tax benefits—taxes get passed along to the LLC’s members to be paid against personal income rather than through the corporation (aka “pass-through” taxes). This can be helpful to new, small or start-up business owners as you’re finding your financial feet. Setting up an LLC is fairly simple, which—in addition to the benefits and coverage it provides—is another reason for its popularity. You “become” an LLC by filing articles of organization (a legal operating agreement that outlines the details of the LLC) to create one. FYI, some company types, like insurance and banks, can’t operate as LLCs. Also, LLCs are state-regulated, and rules can vary from state to state.

Example

Imagine you and your best friends from college decide to start a late-night snack delivery company together. Of course, you trust your friends, but you’re also worried about what would happen if the business were to fail. Not many people are really willing to bet the house (or the car) on a business idea, which is why becoming an LLC is one of the ways to help protect your personal assets.

Takeaway

Setting up an LLC is like getting a flu shot for your finances...

It helps protect your personal finances against liabilities that might hit your company in the future. And—just like a flu shot—the protection isn't absolute, but it usually helps.

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How does an LLC work?

An LLC is a behind-the-scenes business feature—It doesn’t impact the customer experience at all. It can be made up of a single owner, a group, or even a pre-existing corporation which is being reorganized. It’s formed by the creation and registration of an operating agreement called articles of organization.This sets the rules for how to treat the owners (usually called “members”) in legal matters. FYI, unlike corporations, in most states, LLCs aren’t required to hold annual meetings. But if its charter mandates annual meetings, then that is what should be done. Failure to follow through with this commitment could open you up to liability issues later. And LLCs are required to file either semi-annual or annual reports with their state registering agency.

One of an LLC's primary features is the choice it offers when it comes to tax. In this model, you can choose to pay taxes as a corporation or partnership, or have them pass through into personal income tax. Members’ salaries are also considered, for tax purposes, as business operating expenses rather than taxable wages.

How does an LLC compare to a partnership?

An LLC is a formal, legally drafted entity, which is bound by the charter created by their articles of organization and which can be made up of one person or many members. Partnerships, on the other hand, can be as informal as two people working together in a partnership arrangement (aka general partnership). While partnerships can be formalized by an attorney, they don’t have to be—But an LLC can’t exist without getting the law involved.

Protections for members (of LLCs) and partners (in partnerships) also vary. In the case of an LLC, state regulatory agencies determine what protections it gets, For partnerships, protection depends on what kind of arrangement exists. FYI, in a general partnership, partner liabilities are the same as if they were a sole proprietor—personal assets can be on the hook for company debts.

What are the benefits of an LLC?

An LLC’s legally binding structure isn’t just another way to put money in your attorney’s pockets. The formal operating rules and member responsibilities it lays out helps protect its members—Not only against liabilities, but also against other members of the LLC itself. There is also the pass-through tax structure with its tax-saving potential, and what is possibly its biggest advantage to business owners—the ability to keep personal assets separate from a company’s liabilities.

What are the disadvantages of an LLC?

Any time it’s necessary to set something up legally, there are going to be costs involved. Depending on how much spare cash you’ve got lying around, this can put a financial strain on your personal finances. FYI, setup fees vary state by state and sometimes even by what kind of business the LLC creates. In a single-member LLC, you might have to cover any unemployment-tax costs yourself, too. LLCs don’t cover every liability risk, either—In some situations, a member can be held personally liable for fraud, negligence, or other circumstances. Further, business owners can’t usually cash or deposit checks made out to the company—They have to run them through the company’s bank account. Finally, while it’s not necessary to file meeting minutes (if your LLC has meetings), your state regulating agency may require some annual filing. Check your state’s specific requirements carefully—Just as is the case with fees and rules around LLC setup, state laws vary on the filing requirements, and you should consult with an attorney to understand your obligations and what form of ownership is right for your company.

Can owners of an LLC be personally sued or held liable in court?

LLCs are popular for the conveniences and protections they offer to their members, but they’re not bulletproof. There are times when a court can pierce the corporate veil and cut through the paperwork barrier that separates the LLC from its members. Those to whom the LLC owes money may attempt to use this legal approach to try to go after personal assets, if the LLC itself has insufficient funds to cover its debts. FYI, this is much easier for a creditor to do when personal assets or accounts have been allowed to merge with the LLC’s.

In the case of personal fraud or negligence, the LLC won’t shield the guilty party either, because the trouble arose from their actions. It might cover the other members, though. You’re on the hook for unpaid taxes, too—an LLC is no match for the IRS’s might. Again, both of these liabilities can vary depending on the situation, the state, and the LLC’s setup.

Signing contracts is another situation that could open a member to being sued or held liable. How the contract is signed can matter as much as the content within it—If a member neglects to include the LLC’s name or some other notation that they’re signing as its agent, a court could consider them to be the legally responsible party for the contract, rather than the LLC itself.

Is filing articles of organization all that is needed to start an LLC?

Forming an LLC requires filing the articles of organization and operating-agreement forms, and paying any necessary fees. FYI, if your LLC has two or more members, you’ll also need to complete IRS form 8832 to select how you intend to file your taxes (the IRS treats an LLC with two or more members as a partnership, but members can also opt for it to be treated as a corporation or a disregarded entity).

It is very important that you consult a competent attorney and tax advisor when making these important decisions.

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New customers need to sign up, get approved, and link their bank account. The cash value of the stock rewards may not be withdrawn for 30 days after the reward is claimed. Stock rewards not claimed within 60 days may expire. See full terms and conditions at rbnhd.co/freestock. Securities trading is offered through Robinhood Financial LLC.

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This information is educational, and is not an offer to sell or a solicitation of an offer to buy any security. This information is not a recommendation to buy, hold, or sell an investment or financial product, or take any action. This information is neither individualized nor a research report, and must not serve as the basis for any investment decision. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results or returns. Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals. Information is from sources deemed reliable on the date of publication, but Robinhood does not guarantee its accuracy.

Options trading entails significant risk and is not appropriate for all customers. Customers must read and understand the Characteristics and Risks of Standardized Options before engaging in any options trading strategies. Options transactions are often complex and may involve the potential of losing the entire investment in a relatively short period of time. Certain complex options strategies carry additional risk, including the potential for losses that may exceed the original investment amount.

Commission-free trading of stocks, ETFs and options refers to $0 commissions for Robinhood Financial self-directed individual cash or margin brokerage accounts that trade U.S. listed securities and certain OTC securities electronically. Keep in mind, other fees such as trading (non-commission) fees, Gold subscription fees, wire transfer fees, and paper statement fees may apply to your brokerage account. Check out Robinhood Financial’s Fee Schedule for details.

Brokerage services are offered through Robinhood Financial LLC, (RHF) a registered broker dealer (member SIPC) and clearing services through Robinhood Securities, LLC, (RHS) a registered broker dealer (member SIPC). Cryptocurrency services are offered through Robinhood Crypto, LLC (RHC) (NMLS ID: 1702840). Robinhood Crypto is licensed to engage in virtual currency business activity by the New York State Department of Financial Services. The Robinhood spending account is offered through Robinhood Money, LLC (RHY) (NMLS ID: 1990968), a licensed money transmitter. A list of our licenses has more information. The Robinhood Cash Card is a prepaid card issued by Sutton Bank, Member FDIC, pursuant to a license from Mastercard®. Mastercard and the circles design are registered trademarks of Mastercard International Incorporated. RHF, RHY, RHC and RHS are affiliated entities and wholly owned subsidiaries of Robinhood Markets, Inc. RHF, RHY, RHC and RHS are not banks. Products offered by RHF are not FDIC insured and involve risk, including possible loss of principal. RHC is not a member of FINRA and accounts are not FDIC insured or protected by SIPC. RHY is not a member of FINRA, and products are not subject to SIPC protection, but funds held in the Robinhood spending account and Robinhood Cash Card account may be eligible for FDIC pass-through insurance (review the Robinhood Cash Card Agreement and the Robinhood Spending Account Agreement).

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