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If you plan to form an LLC, it's a good idea to clear up any misconceptions you may have about this business entity. The limited liability company (LLC) is one of the most popular, and one of the newest, business entities, and more LLCs are created every year than corporations. Still, many small business owners carry a lot of misconceptions about LLCs around and believe this structure offers protections it does not. 1. LLCs have stock. LLC member ownership is derived from an agreement with the company and other members, not stock certificates. An LLC can issue membership certificates, but this is not usually recommended and these certificates can be very misleading. No state permits an LLC to issue stock, as only a C- or S-corporate can do this. LLCs may issue bonds, however, for the same purpose of bringing in investors. 2. An LLC is a limited liability corporation and the same as other corporations. When you form an LLC, you form a limited liability company, not a limited liability corporation. While an LLC is similar to a corporation in terms of liability protection for owners, it has members and not shareholders and it is not a tax entity, as most LLCs are taxed as a sole proprietorship or partnership. LLCs are created with Articles of Organization, while a corporation is formed by filing Articles of Incorporation. 3. I can form an LLC in Nevada or Delaware and avoid income taxes. While a state like Nevada doesn't require you to pay income tax, you can't simply set up a corporation or business in any state and avoid all tax consequences. If you choose to form a Delaware LLC, you will still need to worry about a business presence and ongoing compliance, as well as certain fees. 4. Corporations are the safer way to avoid liability. A corporation is a legal separate entity, and thus its liability is completely separate from the liability of owners unless the "corporate veil" is pierced. A limited liability company still limits the liability of owners to their level of investment in the company. 5. An LLC is a business entity in terms of taxes. Did you know an LLC is not a tax entity? Whether you have a Texas, California or Delaware LLC, how your company is taxed depends on the number of members. A single member LLC will be taxed as a sole proprietorship, while an multi-member LLC will be taxed as a partnership. You can also choose to be taxed as a corporation. 6. LLCs are just for small businesses. While many small businesses choose to form an LLC for its many benefits and low costs, many large companies are LLCs as well. This includes Chrysler and Amazon! Choosing which type of business entity is best for your business requires a great deal of thought, and you may want to consult with an attorney or business services company. 7. LLCs must be run by managers or directors. Finally, it is simply not true that a limited liability company be run by managers or directors. The LLC may also be set up to be run by officers or members. The agreement of the company determines the titles of agents who run the company, as well as their authority.
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