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Limited Liability Corporation FAQ

Many businesses choose to form as 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. The FAQs below answer many commonly asked questions about LLCs.

For additional information, see our Incorporation and Legal Structures page.

We make business formation EASY. Learn about our DIY business formation services here.

Is an LLC incorporated?

No. "Incorporation" refers to the formation of a corporation under state law, which is a different kind of legal entity than an LLC. 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 does pass-through taxation work for an LLC?

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, there is not a minimum number of people needed to form an LLC. Suppose you decide to start an LLC with yourself as the sole business owner. In that case, however, you must be careful in your actions and documentation to keep your LLC from being considered a sole proprietorship.

Who are LLCs best for?

Organizing your business as a corporation or 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?

Businesses engaged in banking, trust, and insurance are usually prohibited from forming an LLC. Additionally, some states disallow certain professionals (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.

How do I go about forming an LLC?

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

  1. 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.
  2. Articles of Organization: File your paperwork, normally called the "Articles of Organization," and pay the fee associated with the filing.
  3. 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.
  4. 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.

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

And is LLC uppercase or lowercase? Most states require that any registered LLC needs to include some form of "LLC" in its name. For example, under Virginia law, an LLC needs to contain "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?

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 layout the voting rights of all members.
  • It can help ensure that your business' 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.

What securities laws impact LLCs?

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.

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.

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