A limited liability company (LLC) is a business entity operating out of a specific state. Its particular model caters to both single-person enterprises and large organizations through personal protections and tax benefits. This article explains what is an LLC business, its advantages, and the steps needed for formation.
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What is an LLC?
A limited liability company, or LLC, is a popular type of business structure in the United States. Sometimes referred to as a hybrid entity, it takes some of the best pieces of corporations and partnerships/sole proprietorships and mashes them together.
Rules for registering your business as an LLC and regulations for maintaining your enterprise do vary from state to state. Many states allow foreigners and citizens alike to create this type of business structure.
There are no restrictions on the size of an LLC, making the structure available to anyone with a business. One or more individuals can own an LLC, known as “members”. Even small companies or startups with a single member can take advantage of an LLC’s benefits.
Common examples of LLCs
Many large businesses are actually LLCs. Some prominent examples include search engine giant Google, tech company Microsoft, and ecommerce behemoth Amazon. Other big names include Johnson & Johnson, General Electric, Sony, and Pepsi-Cola.
Advantages and Disadvantages of LLCs
There are several upsides and very few negatives to forming an LLC. Let’s take a look at these now.
Advantages
Personal Asset Protection
Perhaps the most appealing aspect of a limited liability company is the ability to safeguard its owners’ personal assets. Should your business become subject to a lawsuit, LLCs create a clear and distinct line between personal and business. Even if your company can’t afford to pay damages, those filing against you are unable to take from your personal finances.
This is not the case with a partnership or sole proprietorship, where there is no such distinction. If hit with legal penalties, your personal assets are fair game.
Tax Options
LLCs have the advantage of choosing a tax status from other business structures, be it sole proprietorships, partnerships, S corporations, or C corporations.
Because of this, it’s rare for this business type ever to pay taxes at the business level. LLCs can benefit from pass-through taxation, where profits pass straight to owners. Members then record their earnings on individual tax returns.
On the other hand, C corporations get hit with double taxes on both the top level and again when reporting on individual returns. When it comes to an LLC vs corporation comparison on taxes, the former takes the win.
Management Flexibility
Whether you’re flying solo or wish to own your business with others, LLCs have a place for you. There are no limits to the number of members an LLC has to have, and that number can change as your company progresses. It’s even possible to divide up profits among these individuals in specific ways.
The ownership also gets to structure the organization how they see fit. They can take it upon themselves to run the business or hire a manager to oversee day-to-day operations. Read more about member-managed vs manager-managed LLC.
Business Credibility
Many other organizations view a limited liability company as a more formal business entity than a sole proprietorship or partnership. Adding the LLC or some form therein to your legal business name goes a long way with customers as well. Some banks may require proof of LLC status to make available certain types of business bank accounts or small business loans.
Simplicity
An LLC is typically easy to form and maintain from year to year. There’s little paperwork involved in the process, and states usually require just one annual report to maintain good standing.
Business owners also have to worry less about administrative procedures that can bog down the corporate structure. With an LLC, you don’t have to hold annual meetings, assign specific officer roles, or keep a record of company minutes.
Disadvantages
Cost
Anyone settled into a sole proprietorship or partnership can benefit from the minimal costs of maintaining business status. Fees for forming an LLC can add up, as many states require upfront payment before allowing you to create your business. Similarly, LLCs must have a registered agent to handle legal documentation.
As each year passes, many states add on additional costs in the form of franchise tax fees or through annual reporting.
Transferring ownership
It’s a bit of a pipe dream to assume the members you start your business with will be there until the end. In corporations, individuals can buy or sell stock to modify ownership, but the same isn’t true for an LLC.
When it comes to transferring ownership in an LLC, usually all members have to approve changes to ownership percentages or add new members into the fold. As you form your LLC, it will be up to the ownership at the time how to structure this rule.
What is an LLC – LLC Formation Process
Forming an LLC is a relatively simple process, but there are some necessary steps involved to ensure compliance with the state. Be sure to follow these steps when creating a business of your own. If you’re interested, read out in-depth guide on how to start an LLC.
Step 1: Select Your State
When starting up an LLC, you can choose any state in the Union to do business in. There’s no requirement when selecting the state you live in or plan to work out of, but most owners opt to use this location for the sake of convenience. If you plan to have a physical location, you will want to establish an LLC in the state with your store.
Each state has its own requirements for forming an LLC, and some tend to have better benefits than others. If looking to form your LLC in a state not your own, you will need to file as a foreign limited liability company. Doing so often comes with additional fees and paperwork.
Step 2: Name Your LLC
Naming your LLC isn’t as simple as coming up with a cool name. LLCs in each state must have unique names distinguishable from all other registered names when you go to file. Using a name search through one of the best LLC services can help you whittle down your options and reduce issues during submission.
Customers have a much better chance of remembering short names that are both clear and memorable. Be sure not to lock yourself into a very specific business type if you plan to expand to new areas in the future.
Your LLC’s designation can’t be misleading to potential customers, though. Anything with “corporation” or some form of the word will surely end up on the rejection file. Along those same lines, it’s not wise to include a word or phrase that alludes to a different business purpose. States may have other rules about naming conventions that you’ll want to be sure to follow.
It’s a good idea to come up with a name quickly, even if you’re not quite ready to file. Several states charge a small fee to hold names for a short period of time while you finalize other details of your startup.
Step 3: Choose a Registered Agent
Every LLC needs a designated registered agent serving as your point of contact for legal and governmental matters. Whoever you choose needs to work regular business hours and have an address in the state you’re forming in.
There’s no rule stating you can’t be your own registered agent, but you’d need to be on hand to handle matters as they arise. Most business owners turn to a service to function as a registered agent. Going with the best registered agent services frees you and other members up to perform other tasks while having peace of mind that sensitive matters won’t get missed.
Step 4: File Your Articles of Organization
This form, submitted to the state, contains important information about your company. Each state’s form is a little different, and some areas may call the document certificates of organization or certificates of formation instead.
As one of your final steps for formation, you’ll need to provide your company name, address, registered agent, and what your business plans to do. Each owner’s name also needs to be on the form with an expectation for how long your venture will exist.
Step 5: Create an Operating Agreement
Your operating agreement serves as the foundation of your business from a legal, operational, and financial aspect. Each member should collaborate to create the rules everyone must follow when running the show.
Although this document is unique to your business, it’s essential to capture key points members can turn to whenever there’s a disagreement among the ranks. List everything that ends up in your articles of organization as a reference and who your members are. This is a great place to record ownership percentages and where responsibilities lie.
From a financial standpoint, cover your tax status and how the company plans to keep financial records. When profits roll in, it should be clear where every penny ends up. There should even be rules on who can change your operating agreement and the method to do so.
Step 6: Get an EIN
An Employer Identification Number (EIN) becomes your company’s unique code for all tax purposes. Any LLC will more than one member requires one, but even single-member LLCs benefit from using an EIN over a social security number. You’ll use this nine-digit number for paying taxes, opening a bank account, or obtaining business licenses.
Step 7: Stay Compliant
Nearly all states require you to check in at specific intervals after forming your LLC. The most common duration is one year, but some governments may wish to hear from you sooner or later. These reports help keep authorities apprised of any changes to your organization and often come with a maintenance fee.
What is an LLC – Top LLC Services
It is possible to accomplish every step of the LLC formation process on your own, but doing so is tedious at best. Missing even one small detail can lead to applications being rejected and significant delays in opening your business to the public.
Consider using an LLC service to do all the heavy lifting for you. These services understand the specific needs of every state, can expedite filing, and are able to function as your registered agent if needed. When it comes time for your yearly report or pooling together tax information, these services can offer assistance there as well.
As you consider an LLC service to help get your business off the ground, we recommend one of the following:
What is an LLC – Frequently Asked Questions (FAQs)
This section serves to answer some of the most commonly asked questions about what an LLC is.
Bottom Line on What is an LLC
LLCs are a popular business structure combining many of the benefits that come with sole proprietorships, partnerships, and corporations. Its two standout features are the protection of your personal assets and the opportunity to pass-through taxes on the business level.
Forming an LLC can be a lengthy process, from coming up with a name to filing all the necessary paperwork. LLC services can remove much of the work and stress, allowing you to focus on the things that matter most.
ZenBusiness has one of the cheapest LLC services, starting at just $49 to get your company up and running. Their filing process is swift while offering the tools and guidance to get everything right the first time. Check out ZenBusiness today to create the LLC of your dreams.