What Is an LLC?
A limited liability company (LLC) is a business structure that separates the owner from the business providing personal liability protection. An LLC is similar to a corporation in liability protection and similar to a sole proprietorship in flexible tax treatment.
An LLC (“limited liability company“) is a type of business structure that has benefits for business owners. An LLC is different from a sole proprietorship and a corporation in many important ways. If you are considering forming an LLC, it could help to know the benefits of this business structure.
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Key Takeaways:
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There are benefits to forming an LLC vs. other types of legal entities.
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LLC owners need articles of organization, registered agent, and, depending on the state, an operating agreement.
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An LLC provides protection from business debts and flexibility with taxes.
Understanding LLCs
How is an LLC different from other types of business entities? One feature of a limited liability company (LLC) is liability protection. You might be wondering what would happen if someone sues your small business. The answer depends on the type of business entity that you have. A sole proprietor could lose personal assets like a house or car. If you are the owner of an LLC, your LLC could protect your personal assets.
There is also liability protection with a corporation, but a corporation is more expensive to operate and has additional requirements such as maintaining a board of directors, keeping minutes, and holding annual meetings.
Another difference between an LLC and other business structures has to do with taxes. With an LLC, income tax can pass through to the owner’s personal tax return, avoiding double-taxation. For this reason, small business owners may want to form an LLC for tax purposes.
How to Form a Limited Liability Company
One step in forming an LLC is to decide on a business name. Another step is to file articles of organization. There are filing fees for the articles of the organization. When you file, you need a registered agent. You can see what formation requirements your state has in this article. Only some states require you to have an LLC operating agreement, but it is a good idea to have.
LLC filing fees are different from state to state. There is also an annual fee. For more information on each step in the process, visit our page on forming an LLC.
Commonly Asked Questions
Do I need to form an LLC for my small business?
It may help to consider how risky your business is. Members of an LLC have asset protection. This means that your LLC protects you from personal liability. The IRS (Internal Revenue Service) allows owners of an LLC to have flexibility when it comes to taxes.
Are there disadvantages to having an LLC?
A sole proprietor does not have to pay filing fees to file articles of organization with the Secretary of State. LLC annual fees add to the cost of having an LLC. You may also have to do annual compliance reports.
Key Differences of LLCs to Sole Proprietorships and Corporations
| Feature | LLC | Sole Proprietorship | Corporation |
| Liability Protection | Limited liability protection for members | Unlimited personal liability | Limited liability protection for shareholders |
| Taxation | Flexible, profits pass through to individual personal tax returns | Pass-through taxation | Possible double taxation as a C corporation, may take extra steps to avoid double taxation through S corporation election |
| Formation | File Articles of Organization or Certificate of Formation with state | No filing necessary, simplest business structure | File Articles of Incorporation with state |
| Annual Reporting Requirements | May have to file annual reports and pay franchise tax | No annual requirements | May have to file annual reports and pay franchise tax |
| Ownership | May be owned by one member as a single-member LLC or have many owners as a multi-member LLC | Only one owner | Owned by one or more shareholders |
| Administration | Simple, may need an LLC operating agreement | Minimal, may need a DBA (doing business as) |
Complex, must have board of directors, bylaws, and annual meetings |
When deciding if an LLC is right for your business, you may want to consult an experienced, local small business attorney. If you are ready to start your LLC, you can use our trusted partner, LegalZoom to help you file your LLC.
Related Resources
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