What is an LLC?
LLC stands for limited liability company. An LLC is a business structure that protects the owner from personal responsibility for its debts. It’s similar to a corporation, but also offers the same pass-through taxation benefit as sole proprietorships. Essentially, it’s a combination of two other popular business structures: corporations and sole proprietorships.
Advantages of an LLC
When a business is registered as an LLC, the owner or owners will not be personally pursued to repay the debts or liabilities of the business. Ownership is usually not restricted, but the regulations do vary by state. If there are no restrictions, anyone can be a member. That opens the door for individuals, corporations, foreign entities, and even other LLCs to get involved. Not all businesses can form LLCs, though. Banks and insurance companies are required to choose a different business structure.
Another advantage to LLCs is they do not directly pay taxes on their profits. Instead, profits and losses are passed through to the LLC’s owners, or members as they’re called, who then report them on their individual tax returns. That way, owners avoid double taxation of both the company and themselves as individuals. LLCs may also choose a different tax classification if they prefer.
Disadvantages of an LLC
Creditors may be able to go after the members if fraud is detected or the LLC doesn’t meet legal and reporting requirements. The good news is, as long as the business meets those requirements, members can not be targeted.
Depending on the state, LLCs may need to be dissolved if a member files for bankruptcy, or passes away. To prevent this from happening, you can utilize a business continuation agreement. The agreement transfers ownership in the event of bankruptcy or death, instead of forcing the business to dissolve and forcing the remaining partners to create a new LLC. If you choose to register your business as a corporation on the other hand, this is not an issue.
How to Register
Regulations vary by state, but you will need to choose a name and file Articles of Organization within your state in order to register your LLC. The Articles of Organization can also be called the Certificate of Organization or Certificate of Formation. They’re a crucial step in the process because they establish the rights, powers, duties, and liabilities of LLC members. The articles also provide the names and addresses of the LLC members, the name of the registered agent, and the statement of purpose.
Then, at the federal level, there will be additional paperwork and fees involved in order to get an employer identification number, or EIN. Once you complete the steps outlined by your state or an LLC formation service completes them for you, business operations can begin.
Compared to a corporation, LLCs are easier to set up — and allow investors more flexibility and protection. Many businesses large and small are registered as LLCs and LLC variations, such as sole proprietorship LLCs, family LLCs, and member-managed LLCs.
For more advice and comparisons on business structures, view our comprehensive guide on how to start an LLC along with other business structures. If questions arise along the way, our team is here to help. The live chat feature in the bottom right corner of the page is a great resource.