- Hi everyone, I'm attorney Adan Durham with 180 Law Co.
in Denver, Colorado,
and you're watching All Up In Yo' Business.
(upbeat music)
We talk a lot about LLCs on this channel.
I've done videos on starting LLCs,
contributing money to LLCs,
how you pay yourself from your LLC.
I've done a lot of videos about LLCs,
but we've never really dug into the basics of an LLC.
We've all heard of them,
but like what is an LLC?
What actually is it?
And what does it mean?
Well, that's what we're gonna talk about today.
Before we get into all of that,
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and guides there for y'all too.
And just as with the last couple of videos I put up,
I've got some random kittens walking around.
If you see some climbing on me
or jumping around in the background, just enjoy it
cause they're effing adorable.
So what's an LLC, LLC.
What did the letters stand for?
It stands for limited liability company.
The limited liability part, that means that the LLCs owners,
which are called the members.
The LLC members aren't gonna be personally responsible
or personally liable for the debts
or the liabilities of the LLC.
So that's where that limited liability part comes in
is it limits the liability to the members themselves.
If the LLC is sued,
the members don't risk losing their personal assets
in that lawsuit.
An LLC is a business entity that is formed
and recognized at the state level.
In other words, it's the state,
not the federal government,
not any kind of local government,
the state government that you'll deal with
to form and maintain your LLC.
And then all of the laws of the state
where the LLC is formed will apply to that LLC.
Now LLCs are kind of new creations,
they haven't been around for a very long time.
LLCs were actually invented by the state of Wyoming
in 1977, according to Wikipedia.
Prior to then most businesses
were either structured as corporations,
where the shareholders are the owners
and the corporation is run by a board of directors,
and there's a double taxation because the corporation
has to pay its own corporate taxes.
So things were either formed as corporations
or as partnerships
where there's one or more people involved,
the partners manage and run the business
but they're all personally liable
for all of the deaths and all of the liabilities
of the partnership itself.
But there's no kind of corporate tax,
the partners are taxed at the individual level
for the partnership income.
So most things where either partnerships or corporations,
and I guess businesses were clamoring for some new way
to combine the two worlds and have the best of both.
They wanted the management and tax ease of the partnership,
but the liability protection benefits
that the corporation gave.
And so thus the LLC was born and then eventually
the IRS got on board
and was like, "Okay, we'll tax people like a partnership,
"even if they're in an LLC."
And then once that happened,
then all the other States kind of jumped on the bandwagon
and started implementing their own state laws
to permit LLC formations.
Compared to corporations in particular, LLCs
are relatively easy to form and maintain.
It's a really simple business structure.
The structure of an LLC can be really flexible
and in most states there are minimal requirements
as far as ongoing compliance and regular filings.
Of course it all varies state by state
because each state has its own laws regarding LLCs,
but for the most part,
and especially compared to corporations, LLC members
can freely change the management tax structure,
really whatever portion
of the LLC structure that they want to.
LLCs are formed by filing a document,
it's typically called articles of organization
or a certificate of formation, depending on the state.
You would file the articles of organization
with the secretary of state
in the state where you wanna form the LLC.
In many States, the LLC officially exists
as soon as the articles of organization are filed.
I briefly mentioned this, but LLCs are owned by the members.
Members are the ones who own the LLC itself.
LLCs can be owned by one person,
which is typically referred to as a single member LLC,
or there can be multiple people involved,
and that's typically referred
to as a multi member LLC.
Members can be individual people,
but they can also be other LLCs.
So an LLC can be a member of another LLC.
A member can be a corporation or a trust,
or really any other kind of entity or person.
There's very few restrictions
on who can be a member of an LLC.
Also members don't have to be a US citizens
or permanent residents here,
you don't have to be physically located
in the state that you're forming the LLC in.
So as far as location requirements
and all of that goes for members,
it's pretty open and flexible.
Management of an LLC can vary, LLCs can be run
and managed by the members themselves.
This is typically called a member managed LLC,
or they can be run by managers
which are elected by the members
and this is typically called a manager-managed LLC.
In a member-managed LLC,
the members are agents of the LLC.
They are authorized to act on behalf of the LLC
and they can bind the LLC
to legally binding contracts.
In a manager-managed LLC though,
it's the managers who are authorized
to act on behalf of the LLC.
And most of the management decisions
and day to day operations are handled by the manager.
And then the big decisions regarding the LLC itself
like disillusion of the LLC
or changing any of the LLC documents.
Usually those decisions are reserved for the members.
Managers can be members or nonmembers of the LLC,
so you can have a manager who is also a member
or managers can be nonmembers.
You don't have to be a member in order to be a manager.
And then LLCs can also be structured more like corporations.
They can have like a managing board or board of managers
that votes on major decisions similar
to how a board of directors would in a corporation.
So this is really part of the benefits of an LLC
is that the management really can be structured
however you want it to be.
When we start talking about LLC taxation,
that's usually where some of the confusion starts to come up
in the state's eyes and as far as the state is concerned,
the LLC is a completely separate entity from its members.
The LLC and the members are separate and distinct beings,
but in the IRS's eyes,
the LLC essentially doesn't exist.
LLCs are considered pass-through entities,
which means that the profits and losses pass-through
to the members of the LLC.
The LLC doesn't have to pay its own corporate taxes
or do its own corporate tax return.
Instead the LLC members report
their share of the profits and losses
on their own individual income tax.
So in a single-member, LLC,
it's treated as if all of the income to the LLC
is the income to the member themselves
and taxed at the personal level on the LLCs income.
With multi-member LLCs,
the profits and losses are allocated to the members,
usually in proportion to their ownership interests.
So if it's a 50/50 ownership between two members,
the profits and losses are allocated 50% to each member
and then each member reports those
on their own individual tax returns.
Now this is how LLCs are taxed by default,
but another nice thing about LLCs
is that they can change their taxation
and elect to be taxed in a different way,
such as an S corporation or taxed as a C corporation.
Those topics are beyond the subject matter of this video,
but I do have a few others
that talk about S corporations and C corporations,
so you can check back to those if you wanna learn more.
So to summarize and wrap it all up,
a few of the primary advantages of an LLC
are of course, that liability protection for the members,
that's probably the biggest one.
You get the benefit of that pass-through taxation.
So it's a relatively easy tax reporting
and you don't have that double taxation
that you would with a corporation.
LLCs are relatively inexpensive
and easy to form and to maintain.
And then finally,
it just kinda makes you look
a little bit more legit, I guess.
That's what a lot of people think
is that you have LLC see at the end of your business name,
it means your real and official business.
So that's a little bit of benefit too.
And of course there are some disadvantages to an LLC
that pass-through taxation it's often good,
but it can be a negative depending on the situation.
Sometimes there are investors
who don't want it to be taxed as a pass-through entity,
or sometimes there are other situations
where pass-through entity, taxation just isn't the best.
LLCs also aren't always great
if you're looking for investors for your business,
or if you plan on going public one day.
Typically investors feel more comfortable investing
in more traditional corporations
and you can issue shares of stock
in the corporation to investors.
So if you're looking for big time angel investors
or have the idea of going public someday,
then the LLC may not be the best structure for you.
And then the other disadvantage
is that there is self employment tax.
You don't get the double taxation
like you do with the corporation,
but because of that, pass-through entity taxation,
the IRS adds some self employment tax
to your income too so they get a little bit more out of it.
So whether or not to operate and form your business
as an LLC,
it's very much fact dependent on your circumstances
and the situation of you and your business.
So because of that,
it's always best to talk with an attorney
who's licensed in your state before you form an LLC.
Just to be sure that it is the best option for you,
and that you're gonna go about it the right way.
That's all for this episode, drop a comment below,
let me know what you think.
And also be sure to check out some of my old videos,
if you want more information on LLCs,
or if you have more questions about LLCs,
I've got a lot info out there
so you can check my old videos for all that stuff too.
And then of course, check out my blog on my website
for more information on LLCs
and starting a business.
I guess we didn't get as much kitten action today
as we were hoping for.
So I'll just give you guys
a quick little, quick little kitten shot
so that this isn't all in vain.
Thank you all so much for watching.
I'm Aden Durham and I'll see you next time.