What Is a Limited Liability Company (LLC)?
What is an LLC? A Limited Liability Company, or LLC for short, makes the best option for small business owners or new business owners. An LLC is known to be very accommodating as it gives business owners flexibility in taxation options and does not limit the number of owners permitted.
In this article, we do a deep dive into questions like “What is an LLC?” and “What is an LLC Operating Agreement?” We also explore the pros and cons of opening an LLC.
What does LLC stand for? LLC stands for Limited Liability Company. An LLC is a formal business structure that requires an Article of Organization to be filed as per state regulations. It is an easy process to set up, rather than setting up a corporation given its flexibility and legal protection for its owners. (LLC owners are called members, not shareholders or partners.)
A quick search for “What does LLC mean?” will probably highlight the tax classification of an LLC. By default, an LLC is taxed as a sole proprietorship or a partnership. An LLC is not required to pay federal taxes since the profits and losses are disclosed on individual tax returns.
If any fraud or criminal behavior is detected, creditors have the authority to reach out to the members of the LLC. If a lawsuit is involved in any event, the personal assets of a business owner are protected.
The Pros of a Limited Liability Company (LLC)
If you’re still wondering “What does LLC mean?” and whether it’s right for you, it might help to consider the pros and cons of this selection. Here are a few benefits of registering as an LLC.
First, the LLC can be treated as a separate legal entity. If a lawsuit ever happens, an LLC provides legal protection for its owners. Unlike sole proprietorships, business owners will be protected since they do not hold any responsibility for business debts or lawsuits held against them, as long as they are not involved in fraud or criminal behavior.
By registering as an LLC, business owners are able to pass through taxes. Double taxation is avoided since the owners of an LLC file their allotted share of profits on personal tax returns. Therefore, these profits are only taxed once, in what they call pass-through taxation. This is unlike corporations, which are required to pay taxes twice: firstly, when owners receive their allotted share of profits, then again when they file personal tax returns.
Credibility advantage is often overlooked. However, it is one of the most important benefits when it comes to forming an LLC. Once an LLC is registered and formed, owners can easily apply for business loans and build a credit history. Unlike a sole proprietorship or partnership, an LLC is much more recognized as a formal business structure. An LLC helps in terms of showing you have a credible business. Hence, boosts your credibility with your clients, suppliers, and lenders that you form a relationship with.
The Cons of a Limited Liability Company (LLC)
There are a few disadvantages to forming an LLC.
It will also cost more to start up an LLC compared to starting up as a sole proprietorship or a partnership. While LLCs are recommended since liability protection is guaranteed, you must be prepared to pay anywhere between $300 – $500.
You should also consider matters relating to equity and compensation as the process is slightly more difficult and challenging when it comes to an LLC. It’s always wise to hire an external legal counsel to protect owners to avoid disagreements.
Is an LLC Right for My Business?
The LLC is recommended for small business owners who are new to the game. LLCs are relatively easy to open and manage since there aren’t many strict rules around management (besides what’s stipulated in the LLC Operating Agreement). It also offers legal protection for personal assets. An LLC is right for you if want to:
- Sidestep double-taxation applicable to a corporation
- Limit any personal liability for possible business debts
- Raise funds from new business partners and investors
For any entity you choose, it is important to keep your business goal in mind and select one that will expand with your business goals. It is not an easy process to shift your business structure to an LLC once you have registered as a sole proprietorship or a partnership. Deeper research on LLCs and how to pick the best business structure depends on the long-term goals of your
How to Form an LLC
The process of registering for an LLC varies by state, so please check with your state for specific regulations. To form an LLC, first, select a business name. In most states, the business name must end with “Limited Liability Company” or “LLC”. Take note of prohibited words for LLC names, such as “banks”, “insurance” or “trust”. A name cannot be used if a business in the state already uses a similar business name. However, to verify if your desired business name has already been trademarked, you can check the trademark database available in the U.S. Patent and Trademark Office.
A registered agent must be appointed for circumstances such as your LLC facing a lawsuit. The registered agent obtains legal documents on your company’s behalf. A registered agent may also be the founder of the LLC or a company.
Then there is the “Articles of Organization”, also known as “Certificate of Formation” and “Certificate of Organization”. It is a legal document issued for Limited Liability Companies set up at the state level. As the state approves your LLC, these documents will mark the start of your LLC formation to conduct your business upon the LLC operating agreement.
These legal documents help in establishing the relationships that exist in terms of any ability, responsibilities, authorization, liabilities, and other agreements. Each of these articles is issued by the state government, and most counties and cities have their own licensing requirements. A one-time fee is charged when filing these Articles of Organization with the Secretary of State. Fees vary by state; for example, as of 2023, Alabama’s LLC filing fee is $200, while Alaska’s LLC filing fee is $250.
Frequently Asked Questions
LLC filing fees vary by state, costing from $40 to $500.
A document (Article of Organization) that concludes the terms of a Limited Liability Company. It outlines the specific needs of its members, including the financial and functional choices made by owners in an organized manner.
Multi-member LLCs use an EIN to file taxes. However, sole proprietors and single-member LLCs are not required to and can use their Social Security Numbers (SSN). Apply for an EIN here.
Though it is not necessary to hire a lawyer to set up an LLC, you may consider a lawyer to save time and help you throughout the process of forming an LLC.