LLC stands for limited liability company, which is a popular business structure in the U.S.
Deciding on a legal business structure is one of the first things you’ll do. A limited liability company — often called an LLC — is one of the most popular choices for U.S. businesses.
But aside from what the letters stand for, what is an LLC, exactly? Let’s find out exactly what it is, why forming an LLC is a good option, how an LLC works, and how to start one.
First, let’s start with the definition — what does LLC mean? A limited liability company (LLC) is a type of business entity that entrepreneurs can create to both own and run their business. LLCs offer protection against personal liability for business debts, lawsuits, and obligations, provided everything is formed and operated correctly.
An LLC keeps your personal and business finances separate. So, if your business runs into trouble, your personal assets should be safe.
For solo owners or partnerships, forming an LLC has multiple benefits. Each state has its own requirements and regulations, so be sure to review what your state offers. LLC owners, known as members, can manage their business directly — no need for boards or formal meetings.
An LLC is a hybrid entity that combines the best features of corporations, partnerships, and sole proprietorships. Owning and running a business can be complicated, so the simplicities and flexibility offered by LLCs are welcome.
All U.S. companies have to choose a legal business structure. The structure that’s right for another company might not be right for yours. Before deciding which choice works best for your business, you need to understand what each provides and requires.
We’ll look at LLCs, sole proprietorships, and corporations so you can compare:
As beneficial as they can be, LLCs do have some drawbacks. You need to consider both the advantages of an LLC and the possible disadvantages before deciding if you want to set one up for your business.
Pass-through taxation is an attractive benefit of domestic limited liability companies. With this system, the business itself does not pay income taxes.
Instead, the owner or owners report business income on their personal tax return. They then pay taxes at their individual rates. This prevents taxing the same money twice (double taxation). Nobody wants to pay more taxes than they have to!
LLCs can also choose to pay taxes as a C-corporation or an S-corporation. This option can provide greater flexibility, reduce self-employment taxes, and add to the LLC’s financial structure.
Want to learn how to start an LLC? Although the details may differ by state, these LLC registration steps are common.
Your business name needs to be meaningful, descriptive, and compliant with state regulations. You should check with your Secretary of State’s website to see if the name you want is available. You’ll probably want a website and social media accounts, so check for availability in those areas as well.
You’ll need a registered agent — whether they’re an individual or a company — to get legal documents for your company. Be sure to check your state’s requirements for registered agents.
Whether your business will have one location or several, you need to choose its main address carefully. It will appear on all licenses, filings, and notices. The state and address also affect associated fees, taxes, and the rules you must comply with. Most owners choose to form their LLC in the state where they operate for simplicity.
To make your LLC official, you must file articles of organization with your state’s government. In most cases, that means the Secretary of State. These documents inform the state that your business exists, its name, the registered agent, and the type of management you will use. You may also need to provide details about the purpose of your business and the owner's details.
People often skip this step, but it’s one of the most important, especially if there are multiple LLC owners. Your operating agreement lists details like decision-making procedures, member roles, profit-and-loss allocations, and ownership percentages. Creating this agreement at the beginning of your venture can save you lots of stress and money.
Like individuals have Social Security Numbers, businesses need Employer Identification Numbers (EINs). You’ll need this number for business licenses, banking, payroll, and tax filing. Your EIN is free, and you can get it easily through the IRS website.
To operate legally, your LLC will probably need several licenses and permits. The kind you need depends on the type of business you’re operating. You have to meet all local, state, and federal requirements.
One of the biggest benefits of forming an LLC is that your personal and business finances are separate. That means you need separate business accounts to take full advantage of that benefit. A separate account also makes your accounting processes easier.
Your recordkeeping will likely include both paper and digital information. Keep all of your formation documents in one place, along with financial records, payroll records, supporting documents like receipts, and operational records.
To comply with tax regulations, you’ll need to keep records for 3-7 years unless advised otherwise by a tax or legal professional.
Setting up your LLC is the first step, but you need to keep it in good standing to benefit from its protections. You may find yourself facing legal questions or problems. It’s better to bring in an experienced lawyer early so they are familiar with your company before issues come up.
A lawyer can help you in many ways and answer questions you may have as your business grows.
We hope we have answered the question, “what is an LLC?” LegalShield members can receive tax advice, assistance with contracts, and help resolving disputes from a lawyer experienced in small business — at a fraction of the price that other lawyers charge.
With one of our affordable LegalShield Small Business Legal Plans, you can save time and money. Receive legal guidance for an unlimited number of business legal matters, including those that are pre-existing and out-of-state. Choose your plan and start creating your LLC today.
An LLC allows for more flexibility when it comes to tax options, formalities like annual meetings, and formal management. For more information, you can review these specific blogs:
Almost anybody can own an LLC. Trusts, corporations, other LLCs, partnerships, and individuals — whether foreign or domestic — can own an LLC, but check the rules in your state.
Yes, a single person can form an LLC. A single-member LLC gives its owner the same protections as LLCs with multiple owners. The solo owner doesn't need partners or employees to operate the business.
Content Specialist at LegalShield, creating educational resources about legal and consumer protection topics. She focuses on making complex legal and financial concepts accessible to readers and has contributed to various educational articles on consumer rights and protections.
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