What is an LLC (Limited Liability Company)
When you start a business, it is a good idea to choose a legal entity structure for it. There are several different types of structures from which you can choose. The simplest type of structure for a business that provides protection to you is an LLC. This structure helps to protect you if your business is sued because it limits the liability to the business instead of to you.
What is an LLC?
An LLC is a limited liability company. This is a legal structure that can be created for your business and filed with the state. When you establish an LLC and register it with your state, it protects you from lawsuits and involves significantly less paperwork than a corporation or other types of legal entity structures.
An LLC can be owned by one or more people. A single-member LLC is an LLC that is owned by one person. If you own your business with one or more other people, you can opt for a multi-member LLC.
Other types of legal entity structures
In addition to LLCs, there are other types of legal entity structures, including the following:
- Sole proprietorships
- Limited partnerships
- General partnerships
- Limited liability partnerships
- Nonprofit corporations
Forming an LLC requires significantly less paperwork than most of these types of structures. General partnerships and sole proprietorships do not provide companies with any liability protection. An LLC is the best way for you to protect your business without having to complete reams of paperwork.
Why you need an LLC for your business
Some business owners run their businesses as sole proprietorships. If you do this, you will not be protected if your business is sued. The creditors of your business could go after your personal assets to satisfy any business debts, and plaintiffs in lawsuits against your business could likewise access your personal assets to satisfy any judgments they obtain against you.
Forming an LLC can protect you from the reach of creditors and lawsuits. A judgment against your business could not be satisfied with your personal assets, and an LLC also makes it easier for you to keep your personal credit separated from your business credit. An LLC also has the advantage of not being subject to double-taxation like corporations.
How an LLC can benefit your business
An LLC can offer multiple benefits to your business, including the following:
- Personal protection from liability
- Pass-through taxes
- Ability to access business credit
An LLC limits the liability of your business to the business itself. As long as you have not committed a crime with your business, your assets will be protected against lawsuits and your business debts.
An LLC also provides you with the benefit of pass-through taxation. When you have an LLC, the profits pass through to each member. The individual members then report their individual earnings on their own tax returns. Corporations are taxed twice. The corporation is taxed and then people are taxed on the incomes that they earn from the corporations.
Limited Liability Company structures also are more flexible than most other structures. There are not very many limits placed on how you can structure your business. You can choose to structure your LLC as a single-member or multi-member LLC. You can choose to manage your own business or to hire others to manage it for you. An LLC also allows you to choose to be taxed like an S-Corporation if that would be more beneficial to you.
LLCs are also relatively simple to form. After you create an LLC, maintaining it requires you to file a minimal amount of paperwork. You don’t have to have a board of directors or to appoint officers like you would with a corporation. There is also no requirement for annual meetings or for recording minutes.
After you have established an LLC, you can apply for a federal tax identification number. This allows you to open your own business bank account and to begin building a separate business credit score. Building the credit of your business can help your business to access credit and loans at better rates of interest so that your business can grow.
How to get an LLC for your business
Most states process LLC applications through their secretary of state offices. You may have to search to make certain that your intended LLC name is not already registered with the state. You will then have some paperwork that must be filled out and filed with the secretary of state’s office. The paperwork will outline the structure of your business and its members, and it will designate someone to serve as your company’s registered agent for service of process. There will be a fee that must be paid when you file your LLC paperwork. You may need to file paperwork or pay fees on an annual basis to keep your LLC in good standing with your state.
You do not have to live in the state where you form your LLC. Some businesses choose to establish LLCs in other states because of the benefits that they can obtain by headquartering their companies there. Some common states that business owners favor for establishing LLCs include Nevada, Wyoming, Alaska, New Hampshire, Montana, and Florida. Some states have better business climates than others in regards to regulations and taxes.
While you can set up an LLC on your own, getting help from a professional might make the process simpler. A professional can also provide you with guidance about the best states for creating your LLC. He or she can also make certain that your paperwork is filed correctly and help you to maintain your LLC so that it remains in good standing.
Forming an LLC for your business is a good idea. An LLC can help to protect you while helping to give your business more credibility. LLCs are also relatively simple to set up and maintain. You can get started today by contacting us for help with setting up your LLC.
Let Us Help You!
Let Us Help You!
Types of LLCs
|Type of LLC||Definition|
|Domestic LLC||A domestic LLC is one formed and operated within your state. Your state has the authority to govern your LLC if formed within their jurisdiction.|
|Foreign LLC||A foregin LLC is one that operates in a different state than the state in which it was formed. For example, you might have formed your LLC in Texas, but you're operating your LLC in Georgia. This does not mean that the LLC was formed internationally.|
|Member-Managed LLC||This type of LLC is where all owners (members) are operating the business themselves, equally. This is the most common type of LLC.|
|Manager-Managed LLC||If some of your business partners want to remain passive in running the business, then this type of structure is a manager-managed LLC. Either members or nonmembers can be delegated as a manager.|
|Single-Member LLC||This is an LLC with only one member.|
|Multiple-Member LLC||This is an LLC with multiple members. A multi-member LLC must be more careful in spelling out carefully with the LLC Operating Agreement the rights of each member in case the LLC folds or there is a death or disagreement.|
|Series LLC||A Series LLC is a unique for of an LLC that acts as a master LLC or umbrella over a series of separate legal entities. This can be a series of members, assets, managers or interests. The series LLC started in Delaware and is now an option in only eight states: Delaware, Illinois, Iowa, Nevada, Oklahoma, Tennessee, Texas and Utah.|
|Restricted LLCs||Restricted LLCs are a type of LLC available in Nevada only that were launched in 2009. These types of LLCs choose to be restricted within their Articles of Organization and therefore cannot make certain business distributions among members until 10 years after forming their LLC.|
|L3C||An L3C company is a for-profit company with a stated philanthropic social purpose. This type of LLC is a hybrid business structure that uses the legal and tax flexibility of an LLC, the social benefits of a nonprofit organization, and the branding and market positioning advantages of a social enterprise.|
|Anonymous LLC||An anonymous LLC is where the ownership details of the LLC is not made public by the state the LLC is registered. New Mexico is one of the only states that allows for truly anonymous LLCs.|
A: The limited liability company structure, much like a corporation, provides LLC owners with limited liability asset protection. This means that the company assets are typically owned by the LLC and are separate from the personal assets from that of the LLC owner(s). Should there be a lawsuit aimed at the company, whether with or without merit, the LLC is the legal entity that would be sued. The assets of the LLC could be attacked, however that would be separate from the personal assets of the LLC owner(s), which would be protected.
The potential liability of an LLC owner is limited only to whatever that owner has invested in the LLC, such as an initial, investment or any retained earnings. This is very much the same as if you had purchased shares of stock in a corporation. In most cases, the most you can lose is what you paid for the stock, but you typically will not lose more than that, no matter how much the company might potentially lose or for however much the company might be sued.
A: If you are the owner of an LLC, you are referred to as a member, and LLCs can have a single member or multiple members — it's up to you.
A: If you need to make a change to your LLC, you need to file an amendment with your secretary of state. Not all changes need to be amended, but generally anything within your LLC's Articles of Incorporation or Articles of Organization that is being changed needs to be filed.
A: Yes! In fact, LLCs are often the perfect structure for sole proprietors because they provide protection for your personal assets without the complexity and rigid regulations of a corporation.
A: As the owner of your LLC, you do not receive a paycheck. Instead LLC members take "draws" or "distributions," which do not have any federal or state income taxes withheld. You are responsible for reporting your share of profits on your personal income tax returns.
A: LLCs can be taxed differently depending on whether they are sole proprietorships or have multiple members, and whether or not you elect to be taxes as a corporation. For more information, talk to your accountant.