On January 1, 2024, the Corporate Transparency Act went into effect. The new rule requires small businesses and Limited liability companies (LLCs) to report ownership information to the Financial Crimes Enforcement Network (FinCEN).
LLCs were designed for exactly what the name implies — to limit liability. In the past, larger companies have used LLCs to attempt new ventures and divisions while protecting the assets of the parent corporation. Hollywood studios even form LLCs for every individual TV and film production.
However, some unscrupulous business people took advantage of LLCs rules and structure to hide money, even using them to commit crimes. The new law forces LLCs to identify those who directly or indirectly own or control the company. This helps the U.S. government identify money laundering, corruption, tax evasion, drug trafficking, fraud, and other crimes.
However, LLCs are still a valuable and viable business structure for those who exist within the legal guidelines. What defines an LLC? How do they differ from other business designations, and what are their advantages, and legal tax implications?
What's an LLC?
An LLC is a business structure that provides limited liability protection to members. Members are not personally responsible for their business's debts and liabilities. If the LLC goes bankrupt or becomes the target of a lawsuit, the members’ personal assets — bank accounts, homes, and cars — are protected.
Types of LLCs
Different LLC types serve various individuals and companies, and one’s nature of work will influence their LLC choice. Some common types include:
Single-Member LLC
A single-member LLC has one owner who's afforded personal protection from business debts and liabilities.
Manager-Managed LLC
With a manager-managed LLC, members select one or more people to manage the LLC. However, the managers don't have to be members.
Member-Managed LLC
All LLC members are responsible for managing the daily business operations in a member-managed LLC.
Multi-Member LLC
Typically used in organizations with at least two owners, multi-member LLCs establish procedures for managing the company and distributing profits.
Professional LLC (PLLC)
PLLCs cater to licensed professionals, with state laws mandating that their companies have a particular business structure. This applies to attorneys, medical providers, and other companies with professional licenses.
Series LLC
A series LLC establishes a parent company with multiple LLCs under it. Each LLC under the parent company has separate assigned members, assets, and liabilities.
Other Types of Business Structures
Companies of all sizes have several business structure options, and the type selected impacts the kind of required documents and personal liabilities, along with how much in taxes to pay and how to raise funds for the company.
Partnerships
One basic business structure is a partnership between at least two people. Partnerships are optimal for companies of a professional group, like physicians and businesses with more than one owner.
Partnerships are limited liability partnerships (LLPs) or limited partnerships (LPs). LLPs afford limited liability to every partner, meaning each partner is insulated from the debts owed by their partners and isn't liable for the conduct of their business partners.
In an LP business structure, the company has a general partner who has unlimited liability, and the rest of the members have limited liability. Members with limited liability protections have limited control within the organization but are not liable for their partners’ actions and debts. The general partner doesn't have those protections.
Cooperatives
Cooperatives are owned and operated by people who directly benefit from the products or services provided and refer to their members as user-owners. This business structure has two levels of members: elected officers and directors who sit on a board and manage the business, and regular members who can vote on how to run the cooperative.
Investors become part of the cooperative by purchasing shares; however, the amount of shares doesn't affect their voting power, so every member's vote weighs equally.
Corporations
C Corp
A C corporation, or C corp, is ideal for organizations needing to raise capital, intend to be sold in the future, or have moderate or higher risks. Starting a corporation costs more than it does to start other business structures, but owners have the most protection against personal liabilities, while the company itself is subject to liability. These organizations can raise capital by selling stock, and shareholders can sell their shares or leave the company without affecting business operations.
S Corp
S corps or S corporations are structured to allow companies to pass profits and losses to the owners' income to avoid corporate taxes. Company owners must register with the Internal Revenue Service (IRS) to obtain S corporation status.
They must also file with the state since they must meet specific IRS criteria to become an S corporation. Like C corporations, S corporations have shareholders who can stay with the company or sell their shares without affecting business operations.
Benefit Corporation
Benefit corporations (B corps) are for-profit organizations designed to accomplish a specific mission and turn a profit. Company shareholders oversee business operations to ensure both profitability and the fulfillment of a public benefit.
Close Corporation
Like a B corp, a close corporation is usually a smaller company with a less formal organization than others. A board of directors is optional; a smaller group of shareholders can manage the company. Depending on the state, company shares cannot be traded publicly.
Nonprofit Corporation
Nonprofit organizations fulfill a not-for-profit mission that benefits the public, like educational, scientific, religious, or charity work. Aside from filing with the state, nonprofits must register as a tax-exempt entity with the IRS.
Sole Proprietorship
A sole proprietorship business structure is owned and operated by a single person. Anyone providing a product or service that doesn't register as any other type of company is considered a sole proprietor. In this structure, because business assets and debts aren't kept separate from personal ones, owners are liable for debts incurred by the company.
How To Set up an LLC
The first step to setting up an LLC is to choose a name. The company name must indicate it's operating as an LLC, including LLC, L.L.C., LC, L.C., limited liability company, or limited company. After meeting specific requirements, an LLC can register with the state, provided they disclose their LLC distinction.
Next, select a registered agent for the LLC. A registered agent is a person or business with a physical address in the state the LLC is located in, which allows the government to send documents. The registered agent can't be the LLC or a post office box and must be available during business hours. Owners can act as registered agents or hire a commercial registered agent (CRA).
Third, to make the LLC official, owners must submit documentation to the state establishing its creation. Depending on the state, this document may have different names, and owners can file it themselves or hire an online LLC filing service.
The fourth step is to develop an operating agreement for the LLC, which serves as a framework for the company's rules, regulations, and requirements and includes crucial information about the LLC. Not all states require an operating agreement, but it’s wise to have one.
The fifth step is to obtain a state Tax Identification Number (TIN) and a Federal Employer Identification Number (EIN) for the LLC. Some states automatically assign TINs during creation; others may require owners to register with the appropriate state agency to obtain a TIN.
Owners can obtain a free EIN from the IRS website to open a business bank account for the LLC and pay federal employment taxes. Some states don't require an EIN and will accept the owner's Social Security number instead.
Starting an LLC can feel overwhelming for anyone new to the process, but abundant resources are available to all. Regardless of the chosen LLC structure, the time and effort invested in setting it up will pay personal and professional dividends.