An LLC, or limited liability company, is a popular type of business entity. Many small business owners choose this type of business structure. An LLC is a business structure that has similar features to both corporations and partnerships.
One of the main reasons business owners like LLCs is because of the liability protection they offer. This means that the personal assets of LLC owners, often called “members," are usually safe if the business runs into debt or legal troubles. It's different from a sole proprietorship, where the owner is personally liable for the business's debts.
This section includes an overview of limited liability companies, a comparison between LLCs and corporations, tax information, and resources to help you craft an LLC operating agreement and file your articles of organization and more.
What Is a Limited Liability Company (LLC)?
An LLC, or Limited Liability Company, is a type of business entity. It combines elements of sole proprietorships and corporations. It offers a unique blend of flexibility and protection for its owners. These owners are often referred to as members. Here are the key features of an LLC:
- Liability Protection: This is one of the most attractive aspects of an LLC. Owners get liability protection. In most situations, members are not personally responsible for the company's debts or liabilities. This means if the business incurs debt or is sued, the personal assets of the members remain protected.
- Flexibility in Management: Unlike corporations, LLCs are flexible. Corporations have fixed management structures with directors and officers. LLCs can either be managed by their members (member-managed) or by appointed managers (manager-managed).
- Pass-Through Taxation: By default, an LLC is a pass-through entity for taxes. This means that the company's profits and losses are passed directly to the members. These members report them on their individual tax returns. This avoids the double taxation that some corporations face. Read more about pass-through taxation in the section below.
Many business owners choose to start an LLC because it offers simplicity and versatility. Operating an LLC can also lend credibility to a business. It shows potential clients, partners, and suppliers that the business is a formal legal entity.
How Do I Start an LLC?
Starting an LLC is a relatively straightforward process. However, it requires careful attention to ensure compliance with state law. Each state has its own laws surrounding how to start an LLC. Follow these steps to get started:
- Choose an LLC name: Your LLC name should be unique and not too similar to existing business names. Often, you must include an abbreviation like “LLC" or “L.L.C." in the name. Other states require you to have the words “Limited Liability Company" in full in the title.
- Select a registered agent: Your registered agent is responsible for receiving legal documents, like service of process, on behalf of your LLC. This can be an individual or a business. They must have a physical address in the state where you're forming the LLC. Some businesses use a registered agent service for this role.
- File Articles of Organization with the Secretary of State: This is the primary document needed to officially form your LLC. It's submitted to the Secretary of State's office, along with a filing fee. The form might ask for basic information like the business's purpose. It might ask what type of management structure the business will have. It will also include the registered agent's details.
- Obtain an Employer Identification Number (EIN): This number is provided by the Internal Revenue Service (IRS). It is essential for tax information. It's also necessary if you plan to hire employees for your business.
- Set up an LLC operating agreement: Operating agreements are not always required by state law. This internal document outlines the rules for how the LLC will run. It covers areas like the management structure, how profits and losses are shared among LLC members, and procedures for adding or removing members. View FindLaw's Sample LLC Operating Agreement here.
Note that for an LLC, you typically file an Articles of Organization instead of an Articles of Incorporation. The latter is used for the formation of corporations. Both documents serve a similar purpose: they officially register the business entity with the state.
Remember, each state might have its nuances when it comes to maintaining an LLC. Always refer to your state's specific requirements or consult a business attorney to ensure you're on the right track.
Setting up an LLC Business Bank Account
One of the biggest advantages of forming an LLC is that members aren't personally liable for the debt and liabilities of the business, but this isn't always the case if you and your partners commingle personal and business funds.
If your LLC is sued and you can't demonstrate separateness between business and personal finances and expenses, you and your partners may become personally liable for the debts and liabilities of the business. Setting up an LLC bank account adds a layer of protection for members of the LLC.
Once your LLC is officially formed, you will receive a certificate of formation. At this time, it's a good time to set up a business bank account. This keeps businesses and personal finances separate. To do this, the bank might ask for your EIN for the IRS. This is like a social security number for businesses. It's essential for tax purposes and to handle employment taxes if you hire employees.
Will I Need a Business License To Operate an LLC?
It depends. The abbreviation “LLC" doesn't mean you're automatically licensed to start doing business. Depending on the nature and location of your business, you might need a separate business license. Various state agencies handle these licenses. It's essential to check local regulations and ensure you meet all filing requirements to legally carry out your business activities.
Depending on the type of business you will be operating, you may need to obtain a combination of federal, state, and local licenses in order to legally set up shop. Businesses requiring a federal license usually involve interstate commerce, such as trucking, agricultural products, alcohol, aviation, firearms and weaponry, fish and wildlife, maritime transportation, mining or drilling, nuclear energy, and broadcast communications.
Those professions requiring a state license run the gamut from doctors and lawyers to teachers. Finally, there are a plethora of local licenses you may have to obtain depending on the nature of your LLC, such as operating a food establishment.
LLCs and Pass-Through Taxation
One of the key benefits of forming an LLC is pass-through taxation. By default, the IRS sees an LLC as a pass-through entity, which means the business itself doesn't pay income tax. Instead, profits and losses pass through to the LLC owners' personal tax returns. This is different from corporations, which might face double taxation. LLC owners can choose other tax options, like the S corp status, to potentially save on taxes. It's crucial to understand these nuances to make the best choice for your situation.
Seeking Professional Help From a Business Attorney
Starting an LLC involves a few steps. It is possible to do this on your own, but getting advice from a business attorney can be very beneficial. They can guide you through formation documents and help you understand concepts like the franchise tax. They can also discuss the difference between important aspects like a manager-managed and member-managed LLC.
If your business is a nonprofit or if you have complex questions, an attorney's expertise can be invaluable. Every state has different laws regarding the formation of an LLC. Understanding the basics and seeking help from a legal professional when you need it can save you time and money later down the road. A business attorney in your area can help you with matters such as how to name your LLC, assistance with drafting a buyout agreement, understanding the tax implications of your LLC, and more.
Speak to an experienced business attorney about LLCs today.
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