What is an LLC (Limited Liability Company)?

What is an LLC (Limited Liability Company)?

Have a small business idea you want to pursue?

A Limited Liability Company (LLC) may be the perfect business structure for your needs as it is a business entity that provides its owners with limited liability.

This means that the owners of an LLC can’t be sued (on a personal level) for the debts and obligations of the company.

An LLC can be formed in most states by filing Articles of Organization with the Secretary of State.

An LLC can be formed in most states by filing Articles of Organization with the Secretary of State or through the help of the right LLC service.

In this article, I’ll take a closer look at what LLCs are, how they work, and some of the benefits and drawbacks of this business structure.

Let’s get right into it.

Who Should Form an LLC?

The following types of businesses are often good candidates for forming an LLC.

Businesses That Want To Limit Their Owners’ Personal Liability

One of the main reasons to form an LLC is to limit the owners’ personal liability.

This means that if the company is sued, the owners will not be held personally liable for the debts and obligations of the company.

This protection is not absolute, however.

The owners can still be held liable if they personally guarantee debt or if they are found to have engaged in wrongful or fraudulent conduct.

Businesses With Multiple Owners

Another common reason to form an LLC is to create a business with multiple owners.

LLCs can have two or more owners, called members.

Such a member-managed LLC can be controlled by individuals, corporations, other LLCs, or foreign LLCs or entities.

Businesses That Want To Be Taxed As An S Corporation Or A C Corporation

LLCs can be taxed as an S corporation, C corporation, Partnership, or Sole Proprietorship.

There are various pros and cons to each.

An S corp is part of what are known as pass-through entities, meaning the income is taxed at the individual level.

With pass through taxation, businesses can benefit from significant tax savings.

C corporations are taxed at the corporate level, meaning the company itself pays taxes on its income.

Then, such corporations are taxed again on a shareholder level (individually) when profits are declared as capital gains or distributed as dividends.

Businesses That Want To Have Different Classes Of Membership Interests

Limited liability companies can also have different classes of membership interests.

This means the owners can have other rights and privileges within the company.

For example, various members of an LLC might belong to a class with voting rights while another class might not have such rights.

This can be helpful for businesses that want to give some owners more control than others.

Businesses That Are Required To File Annual Reports With The State

LLCs are also required to file annual reports with the state in which they are formed.

This report must include the LLC’s name and address, the members’ names and addresses, and the registered agent‘s name and address.

The annual report is a public document, meaning anyone can request a copy.

Advantages and Disadvantages of LLCs

Apart from having owners not be personally liable in a lawsuit, here are some other advantages (along with disadvantages) of LLCs.

Advantages Of LLCs

Here are the main advantages of an LLC.

LLCs Offer Flexibility In Terms Of Management And Ownership Structure.

Based on specific state laws, LLCs can be managed by the members or a group of managers.

This flexibility can be helpful for businesses that want to have different levels of control over the company.

LLCs Are Easy To Form And Maintain.

With the right help, LLCs can be formed in a few days.

Additionally, LLCs only need to file an annual report with the state in which they are formed.

LLCs May Offer Tax Advantages In Some Cases.

The concept of double taxation does not apply to LLCs (unless it’s declared as a C-corp).

This means that the income of an LLC is only taxed at the individual level.

This can provide significant tax savings for business owners.

Disadvantages Of LLCs

There are also some disadvantages to consider when forming an LLC.

More Expensive To Set Up And Maintain Than Other Types Of Businesses.

LLCs are generally more expensive to set up and maintain than sole proprietorships or partnerships.

This is because LLCs must file annual reports and pay yearly fees to the state in which they are formed.

Additionally, LLCs may be required to have a registered agent.

A registered agent is an individual or business that agrees to receive legal documents on behalf of the LLC and performs other related duties.

In this case, knowing the difference between a sole proprietorship and LLC can save you money.

The Location You Form Your LLC Might Not Be The Best Place To Operate It.

Depending on the state where you form your LLC, you may find that it is not the best place to operate your business.

This is because some states have more favorable laws for LLCs than others.

Doing your research ahead of time can help you choose the best state for your LLC.

LLCs May Also Be Subject To More Government Regulation Than Other Businesses.

LLCs are considered separate legal entities from their owners.

As such, they may be subject to regulations like other ‘larger’ business entities.

Based on your state of operation, doing your research here is also critical.

LLCs Do Not Offer Any Protection From Professional Liability.

If you are sued professionally, your assets are at risk.

This is because LLCs do not offer professional liability protection to their members.

If you risk being sued in your professional capacity, you may want to consider another business structure.

LLC vs. Partnership

There are some key differences between LLCs and partnerships. These include:

  • Ownership: LLCs can have multiple owners, while partnerships can only have two (depending on the type of partnership).
  • Management: LLCs can be managed by the members or a group of managers, while the partners must manage partnerships.
  • Liability: LLCs offer limited liability protection to their members, while partnerships do not.
  • Taxes: LLCs can be taxed as mentioned above, while partnerships are only taxed as partnerships.

When deciding which business structure is proper for you, it is essential to consider all these factors.

LLCs may be more expensive to set up and maintain, but they offer more protection from liability.

Partnerships may be less expensive to set up, but they do not offer the same level of liability protection.

Ultimately, the decision comes down to what is most important for your business.

How Do You Start an LLC?

Now that you know what an LLC is and how it works, you might be wondering how to start one.

The process of starting an LLC varies from state to state.

However, there are a few key steps that are typically involved.

Choose A Name For Your LLC

The business name you choose for your LLC is essential. You want to make sure you choose a name that is:

  • Available: The name you choose must be available in your state. You can search for available names with your secretary of state’s office.
  • Memorable: The name should be something people will remember and easily find when searching for your business online.
  • Reflective of your brand: The name should reflect the type of business you are running.

Some states have additional requirements for LLC names, so check with your secretary of state’s office before settling on a name.

As a sole proprietor, you may use your name as the business name or choose a fictitious business name.

If you have a board of directors, you’ll need to choose a corporate name that differs from the individual directors’ names.

Register Your LLC With The State.

Next, you’ll need to register your LLC with the state.

This can be done by filing Articles of Organization with the secretary of state’s office.

When filing a multi-member LLC, you may need to file additional paperwork, such as a Partnership Agreement.

Create an Operating Agreement

This includes information about the management structure of an LLC, the general partnership, the number of members, and how profits and losses will be distributed.

Get An Employer Identification Number (EIN) From The IRS.

An employer identification number will allow you to pay taxes as a business entity rather than as an individual.

Open A Business Bank Account.

An LLC is a distinct legal entity; therefore, you’ll need to open a separate bank account for your business.

This also helps with limited liability protection, creating a clear separation between your personal and business finances.

Comply With State And Local Business Licenses And Permit Requirements.

In addition to the standard business licenses and permits, you may need specific licenses and permits to operate your LLC if required.

For example, some of these might include:

  • Alcoholic beverage license: If you plan on selling alcohol, you’ll need an alcoholic beverage license.
  • Food permit: If you plan on preparing food for sale, you’ll need to get a food permit from the health department.
  • Gun permits: If you plan on selling guns or ammunition, you’ll need a gun permit.

File Annual Reports (In Some States).

From income tax returns to business activity statements, there are several annual reports that LLCs are required to file.

LLC taxes are based on one’s business income.

As an individual, you’ll need to file business tax returns and your personal tax return.

The specific tax requirements for LLCs vary from state to state, so be sure to check with your accountant or tax advisor to see what is required in your state.

As mentioned earlier, in some states, LLCs might also be required to file an annual report with the secretary of state’s office.

This report provides the state with updates on the LLC’s management structure and ownership.

Filing the annual report is typically done online through the secretary of state’s website.

Hold LLC Meetings (In Some States)

In some states, LLCs might be required to hold annual meetings of the members.

Even if it’s not a requirement, this is generally a good idea to ensure that everything is moving in the right direction.

At these meetings, the members will discuss and vote on important matters regarding the LLC, such as changes to the operating agreement or adding new members.

Here’s more in-depth information on how to start an LLC.

How Much Does It Cost To Form An LLC?

An LLC formation for entrepreneurs can be a simple process, as long as you know the initial LLC filing fees for incorporation and the ongoing requirements to keep your business in good standing.

The average cost to form an LLC online using an online incorporation service is less than a thousand dollars.

This includes the filing fee and the cost of an Operating Agreement.

However, additional costs may be associated with getting your business license and permits and annual fees to keep your LLC in good standing.

The initial filing fees for incorporation will vary depending on the state where you form your LLC.

Here’s more information on the various costs of forming an LLC.

What Is An LLC – FAQ

What Is A Professional LLC?

A professional LLC is a limited liability company that is used by business professionals that want to separate their personal assets from their business assets.

This type of LLC can protect the business owner if someone sues the company.

What Is A Series LLC?

A series LLC is a limited liability company that is made up of a group of companies that are separate but have some common ownership.

This type of LLC can offer protection to the business owner if one of the companies in the group is sued.

What’s The Difference Between A C Corp Vs. LLC?

The main difference is that C Corps file their own tax returns.

On the other hand, an LLC’s tax returns are done as part of their owner’s personal income tax returns.

What Is A Single-Member LLC?

A single-member LLC is an LLC that has only one member.

What Is An LLC Operating Agreement?

An LLC is a business entity created by a written agreement between two or more persons.

The operating agreement is the document that outlines the ownership and operation of the LLC.

Do LLC Owners Pay Taxes?

Yes, they do.

They declare their income when doing their personal tax returns.

Is A Sole Proprietorship Of An LLC Taxed?

For tax purposes, one-member LLCs and sole proprietorships are treated the same by the internal revenue service.

Are Personal Assets Of Small Business Owners Protected In An LLC?

The personal assets of small business owners are protected in an LLC if someone sues the company.

However, the members may be liable for the company’s debts if they have personally guaranteed debt.

What Other Taxes Do LLCs Have To Pay?

While this depends on the entity type and state, common taxes that LLCs have to pay can include:

  • Self-employment tax
  • Payroll tax
  • Federal tax
  • Sales tax
  • Property tax
  • Franchise Tax
  • Business license fees

Check with your accountant or tax advisor to see what is required in your state.

Wrap Up.

Forming an LLC is a great way to protect your personal assets from business debts and liabilities.

LLCs are also relatively simple and inexpensive to set up and maintain.

An LLC is worth considering if you’re doing business in a high-risk industry or are otherwise concerned about personal liability.

Are you planning on forming an LLC?

What are the biggest challenges you anticipate?

Let me know in the comments below.

Further reading on AdamEnfroy.com: Getting the right advice when forming your LLC is crucial.

Online legal services not only help entrepreneurs form an LLC, but can also provide on-demand legal support for ongoing LLC needs.

When it comes to creating a bank account, there are specific business checking accounts for LLCs that can offer certain perks and protections.

These types of accounts can provide valuable resources for companies in their early stages.

Disclosure: I may receive affiliate compensation for some of the links below at no cost to you if you decide to purchase a paid plan. You can read our affiliate disclosure in our privacy policy. This site is not intending to provide financial advice. This is for entertainment only.