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You may have seen “LLC” at the end of a business name in your town. If it’s something you’ve noticed here or there, you might have wondered what exactly it means!
Or, perhaps you’re a sole proprietor looking to scale up their business and are wondering if LLC is the right next step for you.
If that’s the case, then you’re in the right place. We’ll be laying the groundwork and answering your general LLC questions right here in this article!
- An LLC is halfway between a sole proprietorship and a corporation.
- An LLC confers liability protection onto its owners, meaning only the company is legally responsible for its debts.
- LLC owners receive their income through the company and pay tax on it using their personal tax rates.
- An LLC does not pay tax directly.
What is a Limited Liability Company (LLC)?
The first thing to understand about a limited liability company LLC is that it is a separate legal entity in which the owners are referred to as “members”.
Members can be anyone; individuals, other businesses, and even other LLCs! In most cases, a sole owner can have charge of an LLC as its only member.
An LLC is separate from its members, and as such, provides limited liability protection.
That means that the individual members are not able to be pursued by the LLC’s creditors – one of the significant features that separates an LLC from a sole proprietorship.
LLCs do not have shareholders. Instead, the members share in the profits generated by an LLC.
Since the owners of an LLC can be individuals or other businesses, it’s not uncommon to see businesses set up an LLC to trade in a specific market or location.
In this arrangement, the profits generated would funnel back to the owning member — whether that be an individual, a corporation, or another LLC.
LLCs are everywhere, and they are particularly common because of the protection they provide as well as the flexibility they have when compared to corporations.
In fact, many of the most popular businesses in America are LLCs. Brands you’re sure to know such as General Electric or Amazon are LLCs, as well as Pepsi-Cola and Nike.
Pros & Cons of an LLC
LLCs are one of the most common business arrangements in America due to the relative ease of setting them up and the flexibility they offer in terms of profit sharing and ownership.
That being said, there are always advantages and disadvantages to any business decision.
The choice of whether or not to set up an LLC will depend on your particular business needs.
Limited liability protection for owners’ assets
Cheaper to register than a corporation
Name recognition: LLCs cannot be registered under the same names as one another
Difficult to transfer ownership, cannot issue stock to shareholders
More expensive to establish than a sole proprietorship
An LLC may be dissolved upon the death or bankruptcy of a member depending on the state
Types of LLCs
Because the LLC arrangement is so popular (or perhaps as a response to its popularity), there are several different types of LLC ownership structures that exist. These include:
An LLC with a single owner is called a single-member LLC. That single member usually pays their business tax through their personal tax returns, listing the business’s losses and profits as their own.
This arrangement does not alter their limited liability protection.
Member managed LLCs are ones where the owning members are able to operate and manage the business themselves.
Most small LLCs are member-managed, allowing the owning members to commit the business to contracts and take part in the day-to-day operations of the business.
A multi-member LLC is exactly what it says it is — an LLC with multiple members who are each part-owners of the business.
Manager-managed LLCs run closer in structure to corporations.
Instead of being involved in the daily running of the business, members vote on key business decisions and direction while employees carry out the regular work.
A PLLC, or professional limited liability company, is an LLC in which the members are members of an accredited professional class like doctors or lawyers.
PLLC members must have professional qualifications that are recognized within their jurisdiction.
LLC vs. Corporation
The primary difference between an LLC and a corporation is that corporations are able to raise capital by issuing stock to shareholders.
Each of these shareholders then becomes a part owner of the business and profits are paid out in line with the percentage of shares owned by each shareholder.
As we have covered, an LLC is owned by its members — however many or few they are. These members decide on the allocation of profits between them.
A corporation also has a more rigid management structure, must schedule and hold regular board meetings, and must adhere to its own corporate bylaws.
The amount of paperwork and the registration required to establish a corporation is significantly higher and more costly than an LLC.
When deciding on the structure of your business, it’s important to understand that these two arrangements offer different benefits and drawbacks.
A corporation is more expensive to set up and more rigid in its structure, but it allows you to pass profits and losses on to shareholders.
An LLC’s profits and losses are part of its individual owners’ tax returns.
LLC vs. LLP
An LLP is a limited liability partnership, and as such must have more than one member.
An LLP is managed by its members directly. Usually, a business like a law firm would be an LLP as partnerships are the usual means of dividing ownership in firms.
LLPs are favored by professionals and provide the same limited liability protection as LLCs, however it is not possible to appoint managers or be the sole member of an LLP.
If you are a lawyer or doctor standing up a firm or practice with others of your profession, an LLP may be right for you.
Best LLC Creation Services
LLCs take a bit of paperwork to get off the ground, so if you find yourself too busy with the day-to-day management of your business, you may wish to engage an LLC creation service.
There are many to choose from, but we’ve picked three that we feel are the top contenders:
LegalZoom has helped over two million businesses with legal advice from every corner of the business world.
With a team of highly-skilled attorneys, LegalZoom can provide advice and assistance in registering your LLC.
ZenBusiness is a company specializing in standing up LLCs.
They have a range of packages on offer with different perks, such as faster turnaround times for legal documentation and free consultations.
With over 70,000 five-star reviews, Incfile is an award-winning business formation service that has helped tens of thousands of businesses in America.
They can help you form any type of business structure with first-class legal advice and guidance.
How to Form an LLC
The 8 steps below will walk you through the process of forming an LLC.
- Secure Your Business Name: LLCs can’t be registered under the same name as another LLC, so the first thing you need to do is register a unique business name that reflects your brand.
- Identify a Registered Agent: Your registered agent is the individual who serves as the point of contact between your business and the state government.
- Write a Notice of Intent to Form an LLC: You need to send a notice of intent to your state government outlining your intent to form an LLC.
- Create an Operating Agreement: The operating agreement of your LLC outlines its structure and financial obligations.
- File Articles of Organization: LLC articles of organization are the documents that formally establish your LLC with the state government.
- Pay Your State Fees: Depending on which state you establish your LLC in, you will need to pay the associated state fees.
- Obtain Certification From Your State: Once these steps have been carried out, you will be formally recognized by your state.
- Register in Another State: If you wish to expand your business, you will need to register your LLC in each new state you intend to operate in.
To speed this process up, you can use one of the LLC formation services listed above.
Now that we’ve covered the basic ins and outs of LLCs, read further to iron out the more intricate details or engage an LLC formation service to guide you through the process and clarify any further questions you may have!
Understanding if an LLC is right for you will help you make the best choice of business structure for your enterprise.
Is an LLC a good idea?
This depends entirely on the size and structure of your intended business, including whether you want to operate in multiple states, be a direct owner, raise shares, and the other factors we’ve covered in this article.
What is a registered agent?
The registered agent for your LLC is the point of contact with your state government. They correspond with state officials and send and receive necessary legal documents.
How does an LLC work?
An LLC is a business with one or more direct owners. It doesn’t have shareholders and has a flexible profit-sharing structure between owners.
Owners of an LLC are called members, and members pay tax on the LLC’s profits and losses through their personal tax returns.