What is an LLC?
Limited Liability Companies (LLCs) are a relatively new business form in the United States. LLCs were first formed in the United States in 1977, and were granted pass-through tax status by the Internal Revenue Service in 1988. This section will provide the answers to the most frequently asked questions about LLCs.
A Limited Liability Company (LLC) is a hybrid legal business structure that combines the characteristics of a partnership, sole proprietorship, and a corporation, creating one of the least complex structures, typically ideal for small businesses and entrepreneurs. Specifically, LLCs have the limited liability of a corporation and the pass-through taxation of a partnership or sole proprietorship.
Advantages of an LLC
Asset Protection – An LLC protects the owners of the company from becoming personally liable for their company’s liabilities and debts. The top reason to form an LLC is for asset protection, meaning the protection of everything you personally own—things like your home, vehicles, and bank accounts.
Ease of Maintenance – The low maintenance of an LLC allows the owners to have reduced paperwork, more flexibility in decision-making, and low annual upkeep. LLC owners don’t have to worry about many of the same things as corporations do, such as electing a board of directors, holding shareholders meetings, or maintaining internal records like meeting minutes.
Pass-Through Taxation – Tax season for an LLC is simpler and less expensive than other business structures. Unless it files for a different tax classification, an LLC is a pass-through entity, since it’s not a separate taxable entity apart from its owners. Income and losses pass through the business and onto the members to report on their individual income tax return. LLCs typically only file informational tax returns.
Credibility – A business starts with its appearance, and having the “LLC” title in your business name will provide your company with certain a level of prestige. These endings convey permanence and encourage trust from likely investors or clients, and show that you are serious about your business.
Disadvantages of an LLC
Limited Growth – Since LLC owners can’t issue shares of stock to potential investors, most investors won’t fund LLCs. Investors prefer stock options, rather than owning a percentage of an LLC, which can complicate an investor’s personal taxes.
Self-Employment Tax – LLC earnings are typically subject to self-employment taxes. Members or owners aren’t employees, so members or owners who work in or manage the business must pay self-employment taxes on their share of the LLC.
Role Confusion/Lack of Legislation – LLCs are not governed by as many statutory requirements as corporations, such as requirements for meetings, directors and officers. LLC agreements are created to make up for the little legislation and lack of operating procedures that exist for LLCs. While this leads to flexibility for an LLC, it also puts the LLC at risk for poor management or role confusion within the LLC.
Also due to an LLC’s lack of uniformity, LLC asset protection differs from state to state, specifically laws about charging orders against LLCs. Some states have protection on par with a corporation, while other states can more easily pierce the corporate veil (hold shareholders personally liable for LLC or corporation actions).
Types of LLCs
Single Member LLC – A single member LLC (SMLLC) is an LLC that has only one owner. All 50 states plus Washington DC now permit SMLLCs. Much like multi-member LLCs, the owner of an SMLLC has flexible organizational options for the business and reports LLC income on his or her personal income tax return. Not all states have the same degree of limited liability for an SMLLC, so it’s important to do your research in that respect depending on where you start your business. SMLLCs will be member-managed (if the member is responsible for decision-making and day-to-day operations) by default, although this can be changed to manager-managed (if the member appoints a manager to make the decisions and run day-to-day operations).
Multi-Member LLC – A multi-member LLC is an LLC that has two or more owners. Multi-member LLCs have standard pass-through taxation by default and typically have a strong degree of limited liability protection, unlike SMLLCs in some states.
Series LLC – A series LLC is an LLC with specific divisions known as “series.” Each series can have a business purpose, tax election, assets, and liability all on its own. This option can be cheaper than forming multiple LLCs. Series LLCs can be formed in about a dozen states and are a newer concept in the business world.
Low-Profit Limited Liability Company – A low-profit LLC (L3C) is a hybrid of an LLC and nonprofit business model. While they can earn a profit, they operate to benefit the general public without focusing on profit.
Anonymous LLC – An anonymous LLC means its owners are not publicly identifiable by the state. Members of the public can’t look up the ownership information of anonymous LLCs. Delaware, New Mexico, and Wyoming are the only states currently that permit anonymous LLCs.
Professional LLC – A professional LLC (PLLC) is designed for licensed professionals, such as lawyers, doctors, architects, engineers, accountants, and chiropractors. Some states don’t allow PLLCs and require professionals to form other entities, such as LLPs or professional corporations.
Is Creating an LLC Right For my Type of Business?
To determine whether or not an LLC is right for your business, consider your long-term business goals and how you want your business to grow. An LLC is the user-friendly solution for small to medium-sized businesses, with its easy management, flexibility, and pass-through taxation. If growing your company large with investors is not your top priority, you’re looking for the least complicated taxes and annual maintenance, and you’re just needing limited liability protection for your business, an LLC is probably right for you.
How Do I Start an LLC?
Starting an LLC is one of the simplest ways to form your own business and ensure you have limited liability for your assets. You can choose to form your own LLC, or use a business formation service, such as Active Filings.
When you use Active Filings to form your LLC, you’ll save a substantial amount of time and energy, lower your risk of errors or rejections, and get supplementary services, such as registered agent service. Use Active Filings to form your LLC today by visiting our Incorporation Packages page.
To start an LLC yourself, you’ll need to file the Articles of Organization with the Secretary of State where the business is going to operate (your “home state”). You can typically find a downloadable PDF of the Articles of Organization on the Secretary of State’s website, although some states allow you to create your own document and will provide a list of information requirements. Most states let you submit this document online, by postal mail, or in person. Once your Articles of Incorporation are approved, your LLC is officially formed.
Generally, most jurisdictions require the Articles of Organization to contain, at a minimum, information about the following:
- Business name
- Business address
- Main activity
- Name and address of the registered agent
- Name and address of initial members
Business names must include a name ending such as “Limited Liability Company,“ “Limited Company,” “Limited,” or its abbreviations, “LLC,” “LC,” or “Ltd” (name endings vary state by state).
For tips on choosing a business name and to conduct a business name availability search, check out our Free Business Name Search page.
After your Articles of Organization are filed, your LLC should have an organizational meeting where an operating agreement is adopted. We will provide you with the proper operating agreement template. Member certificates can be distributed to members, and these transactions should be recorded in the LLC ledger. All of this information can be maintained in an LLC record book, which is included in the corporate kit that we provide you with our Full or International Plan.