Limited Liability Company FAQ

Many businesses choose to form a limited liability company ("LLC," often mistaken as a "limited liability corporation") because it combines the benefits of pass-through taxation with protection for personal assets. For additional information, see our Incorporation and Legal Structures page.

This guide is designed to help entrepreneurs, new business owners, and anyone interested in understanding this type of business structure. Our goal is to make the world of business entities more accessible and understandable for everyone.

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Let's dive into the most frequently asked questions (FAQs) about LLCs.

What is an LLC?

An LLC stands for limited liability company. It's a type of business structure that combines features of other structures. Owners of an LLC get the benefit of limited personal liability like the owners of a corporation. However, there are not as many formalities of corporations, such as a board of directors. Unlike a general partnership or sole proprietorship, if the LLC incurs debt or faces legal action, the personal assets of the owners (called members) are generally not at risk.

Is an LLC incorporated?

No, an LLC is not incorporated. Incorporation refers to the formation of a corporation under state law. Corporations are a different kind of legal entity. While the owners of an LLC can protect their personal assets from business creditors like the owners of a traditional corporation, it is not incorporated. Additionally, LLCs can have a more flexible management structure because they are not required to follow corporate formalities.

How do I file taxes as an LLC?

Employment taxes differ for LLCs depending on their structure. Single-member LLCs typically report income and expenses on the owner's personal tax return using Schedule C. Multi-member LLCs are generally treated as partnerships, filing a partnership tax return (Form 1065) and distributing earnings or losses to members via Schedule K-1 for their personal returns. 

However, LLCs can opt out of being taxed as corporations. If so, they file a corporate tax return, either as a C corporation or an S corporation. Each has its own different implications for taxation. Always consult with a tax professional to ensure accurate and compliant filing.

How does pass-through taxation work for an LLC?

Pass-through taxation means that the LLC itself doesn't pay federal income taxes. Instead, the income or losses of the business pass through to its owners, who report them on their personal tax returns. This avoids the "double taxation" faced by C corporations, where both the company and the owners pay taxes. The Internal Revenue Service (IRS) sees the LLC as a flexible tax entity.

Unlike corporations, LLCs are pass-through entities not considered to be separate from their owners for tax purposes. With an LLC, the profits and losses are passed through to the business owners, who report them on their individual tax returns (like a sole proprietor or partnership).

The LLC, in general, does not pay income taxes for itself and is therefore not subject to the double taxation of corporations, where income is taxed at the corporate level and again when it is distributed to its owners. However, the LLC owners must pay taxes on their share of the profits from the LLC on their personal income tax return. 

LLCs may elect to be taxed like corporations, meaning that the LLC would pay taxes on its profits at the corporate tax rate before passing them along to its owners, who would pay the personal income tax on those distributions.

Is there a minimum number of people needed to form an LLC?

No, an LLC can be formed by one person. This is known as a single-member LLC. Suppose you decide to start an LLC with yourself as the sole business owner. In that case, you must be careful in your actions and documentation to keep your LLC from being considered a sole proprietorship. Of course, multiple people can also form an LLC, referred to as a multi-member LLC. Each state has its own rules, but by law, the majority allows for both single-member and multi-member structures.

Who are LLCs best for?

LLCs are ideal for entrepreneurs and small business owners who want to protect assets without the more complex structure and formalities of corporations. They are especially beneficial for those who prefer a flexible business structure, like a general partnership, but also want the legal protections of a corporation.

Organizing your business as an LLC is most helpful in two situations:

• The business is engaged in a dangerous activity that makes it more likely to be sued or has the potential of racking up large amounts of debt
• The business owners have large amounts of personal assets that they want to shield from any potential liability associated with the business

Are there any businesses that can't form an LLC?

Certain types of businesses can't form an LLC. Businesses engaged in banking, trust, and insurance are usually prohibited from forming an LLC. Additionally, some states disallow certain professionals, such as architects, doctors, lawyers, and accountants, from coming together to form an LLC. Check your state's laws to find out if your business is eligible to form an LLC. 

Furthermore, nonprofit corporations seeking tax-exempt status usually don't choose the LLC structure.

How do I form an LLC?

To form an LLC, you'll need to file an Articles of Organization with the Secretary of State in your home state. You will also typically need to pay a filing fee. You'll also need to choose a unique name for your LLC. In many states, you must appoint a registered agent to receive service of process. Some states may require additional legal documents or have other requirements.

In most states, you will be able to form an LLC by following four (or fewer) simple steps:

• Business Name: Find an available business name that conforms to your state's rules regarding LLC names. Many state governments will tell you if the name you have chosen for your LLC is a valid name under the state's laws.
• Articles of Organization: File your paperwork, normally called the Articles of Organization, and pay the fee associated with the filing. This is similar to the Articles of Incorporation, which is required for corporations.
• Operating Agreement: Create an operating agreement that will dictate how the LLC will be run. This normally lays out all the rights and responsibilities of all LLC members.
• Publish a Notice: Some states require that LLC members publish a notice to the public in a local newspaper of their intent to form an LLC.

Additionally, if your LLC does business under a name different than its official name, you'll need to file for a DBA (Doing Business As) with the appropriate government agency. You should also consider setting up a bank account for your business. It's a good idea to check with your local secretary of state office or a legal professional to know the requirements for your state.

Do I need to put “LLC" in my business name?

Yes. Most states require that your LLC's name includes “Limited Liability Company" or its abbreviations like “LLC" or “L.L.C." This informs the public that they are dealing with an entity that has limited liability. For example, under Virginia law, an LLC needs to contain either "limited company," "limited liability company," or their abbreviations. States generally do not specify whether LLC needs to be capitalized.

Do I need an operating agreement?

Not all state laws require operating agreements. This document outlines how the LLC will be run. It also discusses the responsibilities of the members and how profits or losses will be divided. It provides clarity and can prevent disputes among members in the future.

Although many states do not require every LLC to be run by an operating agreement, here are some reasons why having one is a great idea:

• It will establish rules regarding the sharing of profits and losses among the owners.
• It will dictate how meetings are held as well as lay out the voting rights of all members.
• It can help ensure that your business's status as an LLC will be legitimate and more respected by a court when considering your limited personal liability.
• It can resolve conflicts between owners before they arise.
• It avoids the default rules that would be imposed by the state absent an operating agreement.

Do I need a business license?

Yes. Most businesses, including LLCs, typically require some form of business license or permit to operate legally. The type of business license you need varies based on your location and the type of business you're running. Some licenses are issued at the local city or county level, while others might be state-specific. For example, a restaurant may need a health permit. A retail store might require a state tax permit. 

It's crucial to check with your city, county, and state's regulations to ensure you have all necessary licenses and permits. Operating with them can lead to fines and other penalties.

What securities laws impact LLCs?

Securities law can impact LLCs when they are raising capital or issuing ownership interests. By definition, a security is an investment in a profit-making enterprise that is not run or controlled by the investor. Therefore, if you plan to have more than one owner (member) in your LLC, you may have to worry about securities laws.

If ownership interests in your business will be considered securities by the SEC, you must ensure that you qualify for an exemption before you take money from investors. If you cannot qualify for the exemption, you must register the sale of the interest in your LLC with the state and the federal SEC. Depending on how and from whom they raise funds, the LLC might need to comply with federal and state securities laws. This can be complex. It's essential to seek legal advice if your LLC plans to raise capital.

Get Professional Legal Help With Your LLC

Many of your state's LLC forms can be completed without the help of a lawyer, but if you want to DIY, it can be beneficial to go through a reputable online business formation service. If you have questions about your state's laws and your obligations surrounding them, you may want the help of a legal expert.

Contact a local small business attorney and get the help you need to navigate business regulations with confidence.