Business Entities 101: Limited Liability Company

Welcome back to the Business Entities 101 series. This week we will be discussing another popular business entity, the limited liability company, or LLC. Just like last week, we will be discussing what the entity is, how it is formed, the liability protection it provides, how it will be taxed, and if it is suitable for your business.

What is a Limited Liability Company and How is it Created?

A limited liability company is a hybrid of a partnership and a corporation. This entity was created to provide the best of both by combining the tax treatment of a partnership with the liability protection of a corporation. It also provides flexibility in structure as it is not subject to the formal rules and regulations of a corporation.

A limited liability company is created by filing a certificate of formation with the State.

What is the liability Protection of a Limited Liability Company?

The limited liability company provides its members with limited liability protection. As a recap from our discussion in the corporations’ post, this means the members are only liable for the amount of money they put into the business.

It is important to note that the limited liability protection can be disregarded by a court in very specific scenarios. The most common scenario is where members of the company commingled personal and company funds. The number one way to avoid this is to have a separate bank account for the company.

How are Limited Liability Companies Taxed?

A limited liability company is taxed as a partnership. This means that each member is taxed upon how the earnings and losses of the company have been allocated to them. However, you can elect to be taxed as a C corporation. To find out more about how a C corporation is taxed, please see our previous post here.

A Texas limited liability company is also subject to the State’s franchise tax. For more information, please see our post about the State’s franchise tax here.

Is this the Business Entity for You?

The answer of course is, “it depends”. If you are wanting a lifestyle business, then a limited liability company might be the way to go. However, if you are wanting to create a scalable business, then a corporation may be better. It all depends on what you want out of your business and your startup attorney can help you figure that out.