LLC (Limited Liability Company) Guide

Business opportunities necessitate forming a formal business model to enable owners to carry out operations legally and in an orderly fashion. Businesses can adopt several business structures in the US, including S Corporations, C Corporations, and Nonprofits, but the LLC (Limited Liability Company) is one of the most popular with small business owners.

An LLC (Limited Liability Company) is a separate legal entity from its owner. LLCs offer many advantages to business owners who want to separate their personal assets and dealings from their taxed business assets, limiting their personal liability.

What Is an LLC?

A Limited Liability Company (LLC) is a business model formed under state regulations. LLC owners, aka members, may include individuals, other LLCs, corporations, and foreign entities.

Limited Liability Companies can have an unlimited number of members or only one member. Most states permit the formation of a Single and Multi-Member LLC.

While LLCs are suitable for many businesses, they are not applicable for the following businesses due to the liability protection LLCs possess:

· Banks

· Insurance Companies

· Professional Partnerships, e.g., Law firms, Accountants, Doctors/Dentists Offices

Before forming an LLC, check your home state’s rules and federal tax regulations for further guidance. Also, keep in mind the rules that apply to a foreign LLC differ from those that apply to a domestic LLC.

LLC Basics

A limited liability company (LLC) is the preferred business structure for most businesses in the US, especially startups and small businesses. LLCs offer limited liability protection to the owner, including pass-through taxation that avoids the double-level taxation applied to a C corporation and the separation and protection of the owner’s assets from legal claims, creditors, and lawsuits.

LLC formation follows state law, and although the general formation stipulations are similar, these laws vary from state to state. Hiring legal counsel when forming an LLC is not mandatory, but it is advisable, especially if in a multi-member LLC.

LLC also feature less paperwork during their formation and have fewer complexities and costs. This provides for operational ease, making it easy for owners to comply with state regulations and compliance.

There is no requirement for a board of directors, annual general meetings, and the maintenance of strict records with this company model. All that’s required is the “Articles of Organization,” a document that includes basic information like the business name, names of members, and the business address. This information is held at the Secretary of State’s office in most states and comes with a filing fee.

Once the LLC registration is complete, the members must develop an Operating Agreement, although it is not mandatory. Members can then obtain the required business permits and licenses.

The LLC is relatively new in the US. First enacted in Wyoming in 1977, it combines the advantageous features of a partnership and corporation. Since then, all US states have passed legislation and modified the act to allow for the LLC in its present form.

Overall, Limited Liability Companies have gained popularity over the years. They offer business owners the pass-through taxation feature of a partnership and less liability than a corporation, coupled with unrivaled flexibility in management and operation.

Famous examples of LLCs include:

· Blackberry

· Chrysler Group

· eBay

· Hertz Rent-a-Car

· IBM

· Nike

· Pepsi-Cola

· Sony

If you are new to LLC’s start with our LLC Basics Guide.

Types of LLCs

Single Member LLC

A Single-Member Limited Liability Company, abbreviated SMLLC, is a business entity with a single owner that gives its owner tax benefits and limited liability protections. This means that if the business owes money and cannot pay or gets sued, the owners’ personal liability is limited.

Professional LLC

A Professional LLC or PLLC is a business entity suitable for licensed professionals and only provides licensed services. It offers tax benefits and limited liability for medical, legal, and other professionals, including doctors, dentists, lawyers, and accountants, against professional malpractice claims.

Series LLC

A series LLC is a special Limited Liability Company (LLC) with articles of formation that allow for the unlimited separation of membership interests, operations, and assets into independent series. Each series is a separate entity operating with a unique business name, bank account, and books and records.

This type of LLC may have different members/managers in each series with differing rights and obligations. Series LLCs provide an extra layer of protection as assets owned by one series are not liable to the risk of liability of other series.

Member Managed LLC

In member-managed LLCs, the owners of the business have collective control over company decisions and operations. In Single-Member Limited Liability Companies, this type of business structure is easy to operate as the single-member makes all company decisions.

However, it may be advisable to opt for a manager-managed LLC (see below) in a multi-member LLC to allow for effective decision-making, legal and financial compliance, and minimal disputes.

Manager Managed LLC

In manager-managed LLCs, the members select the manager/managers of the company. These managers are responsible for handling the company’s daily operations, financial decision-making, and legal affairs.

Foreign LLC

Foreign LLCs refer to US companies that do business in “foreign” states and not in the home state in which the LLC was registered. States stipulate that companies register as foreign LLCs to make sure they operate per tax and regulatory requirements.

Advantages and Disadvantages of the LLC Business Model

Advantages

· An LLC can sign contracts and file lawsuits.

· LLCs protect each member from personal liability for their actions and company debts, offering personal asset protection.

· Unlike corporations, LLCs provide a flexible management structure for business operations, LLC taxes, and LLC management.

· LLCs provide significant tax benefits and beneficial tax status to their members, especially in small businesses.

· LLCs simplify record keeping and tax compliance for small business administration compared to other business models.

· Unlike in an S corporation, an LLC may conduct business with an unlimited number of members.

Learn more on the full Advantages of an LLC.

Disadvantages

· Adding a new LLC owner or transferring ownership is complex and requires all members’ approval.

· Despite tax savings, forming an LLC requires the owner to pay a formation fee and many ongoing fees, making it more expensive than a sole proprietorship or general partnership.

· LLCs are not ideal for market positioning advantages and businesses that intend to seek outside investors. Venture capitalists and angel investors prefer funding other business entities such as corporations. This is because LLCs cannot later sell their stocks to raise capital while corporations can.

How to Start an LLC

If you want to form an LLC, you must follow state laws and regulations to remain compliant. After filing Articles of Organization with the Secretary of State’s office and paying the necessary filing fees, your LLC becomes operational.

Make sure to follow state and tax regulations in your home state as these, as well as filing fees, differ from state to state.

Check out our complete guide on how to start an LLC.

Limited Liability Company Filing as a Corporation or Partnership

Filing an LLC as a corporation requires filing specific forms for corporations. These forms differ for C Corporations (Form 1120) and S Corporations (Form 1120S, US Income Tax Return for S Corporations). The IRS requires each owner in a corporation to report their share of corporate income, credits, and deductions.

Filing an LLC as a partnership requires filing a Form 1065, US Return of Partnership Income. Each owner should show their share of partnership income, credits, and deductions and pay self-employment taxes on their share of earnings.

Complete guide on filing your LLC as a corporation or partnership

Forming a Family Limited Liability Company

A Family Limited Liability Company (Family LLC) provides the same tax and limited liability protections to the owner, giving owners personal asset protection.

It is its own legal entity, providing an effortless way to pass on business ownership to other family members in the event of a member/members’ death. This lowers the size of the estate and the eventual taxes the company will need to pay to the Internal Revenue Service.

Guide to Forming a Family Limited Liability Company.

How Are LLC Members Taxed?

The IRS treats the LLC as a pass-through entity for federal income tax purposes. This means that LLC taxes work via pass-through taxation – members do not have to pay taxes on business income. However, members do not benefit from pass-through taxation themselves and must pay federal, state, and local government taxes on their share of the company profits. They could also be liable for self-employment, payroll, and sales taxes.

Note that an LLC taxed as a different business entity is a possibility – e.g., S Corporations.

Complete Guide on How LLC Members Are Taxed.

Limited Liability Company (LLC) Operating Agreement

The Written LLC Operating Agreement is a legal document stating the ownership and member duties of the company, allowing it to conduct business seamlessly. It explains how to form an LLC, the operational, legal, and financial procedures that the business should follow, and outlines the relationship between company owners and appointed managers.

LLCs should have an operating agreement, though it is not mandatory.

As a rule, Limited Liability Company (LLC) Operating Agreements spell out:

· Article I: Articles of Organization

· Article II: Management and Voting Procedures

· Article III: Capital Contributions from Members

· Article IV: Profit and Asset Distributions

· Article V: Changes in Membership

· Article VI: LLC Dissolution Procedures

Check out the Go Vitru guide to LLC operating agreements.

How Do Limited Liability Companies (LLCs) Compare with Other Business Models?

Sole Proprietorship vs LLC

A sole proprietorship is an unincorporated legal entity without structure run by a single owner. Examples include retailers and freelancers.

An LLC is a separate business entity created under state law, which combines elements of a sole proprietorship, corporation, and partnership. Unlike with LLC members, a sole proprietor does not separate the business income and dealings from their personal income dealings, making them liable for any claims, debts, and judgments against the business.

Sole proprietorships have only one owner, while LLCs can have multiple owners. LLCs also require Articles of Organization to operate legally and for federal income tax purposes. Sole proprietorships simply need a business name and the relevant permits and licenses to operate. Sole proprietorships do not have to file annual reports like LLC.

For more information see our guide on Sole Proprietorships vs LLCs

LLC vs S Corporation

An LLC is a business entity; an S corporation is a tax classification that the Internal Revenue Service (IRS) taxes as a partnership. You must first register as an LLC and meet strict Internal Revenue Service regulations to qualify as an S Corporation.

An S Corporation provides limited liability protections like an LLC, with the added stipulation of taxing 100 owners/shareholders or fewer as a partnership.

For more information see our guide on S Corporations vs LLCs

LLC vs C Corporation

A Limited Liability Company (LLC) offers owners the benefit of a pass-through tax structure with limited liability protections and flexible record keeping. However, with corporations, owners/corporate shareholders have limited liability for company-related debts, and they must keep strict records of their business. In both a corporation and LLC, its members must file personal tax returns. Crucially, a C corporation may sell stocks to raise capital, but an LLC may not.

For more information see our guide on C Corporations vs LLCs

LLC vs Nonprofit

Both a Limited Liability Company (LLC) and a nonprofit organization offer limited liability protection to their owners. However, this is where the similarity stops. LLCs are formed to run a business and make a profit. At the same time, nonprofit organizations must be charitable, religious, scientific, or for other IRS-specified purposes and not generally make a profit.

Typically, the IRS considers nonprofit organizations tax-exempt for tax purposes. However, this is not an automatic exemption.

For more information see our guide on Nonprofits vs LLCs

DBA vs LLC

An LLC is a legal business entity formed to do business and make a profit. However, a DBA, aka “doing business as” name, is a registered name for a business. DBAs are applicable in LLCs, sole proprietorships, partnerships, and corporations.

For more information see our guide on DBAs vs LLCs

How Much Does It Cost to Form an LLC (Limited Liability Company)?

The highest cost business owners incur when forming a limited liability company (LLC) is the state filing fee, which ranges between $40 and $500, depending on the state location.

Other common LLC formation costs include:

· Business Licensing/Permit Fees

· Fictitious/DBA Name Fees

· LLC Name Reservation Fees

· Publication Fees

From there, you can opt to form an LLC by yourself or hire a lawyer or professional LLC formation service to help you with your company setup. These LLC formation services charge a small fee, and the costs vary from state to state.

Business License and Permit Fees

Depending on your location and industry, your LLC may require federal, state, and local licenses or permits to operate within the law. Some examples include general, health, food and liquor, zoning and land-use, and occupational licenses.

Fictitious Name/DBA Name Fees

A fictitious name is not a requirement when forming an LLC (Limited Liability Company). However, if you want to create a fictitious name or separate brands under your LLC, you may need a fictitious/DBA name or a “doing business as” name. This process attracts a fee, which varies from state to state, county, city, and business structure. Typically, filing costs for DBA names range from $10 to $100.

Name Reservation Fees

In Alabama, a new LLC will need to reserve its name at the cost of $10-$28. This requirement is optional in other states.

Publication Fees

Arizona, New York, and Nebraska require your LLC to publish a formation statement in a local newspaper. This cost varies between $40 and $2,000.

LLC Registered Agent

An LLC registered agent, aka a statutory or resident agent, is an individual or business that accepts legal and tax documents on behalf of your business. Most states require that LLCs and other companies have a registered agent.

Registered agent services offer several benefits, including:

· Improved business image

· Peace of mind

· Privacy

· Operational flexibility

· Helps with out-of-state registration

· Helps keep important company documents like legal documents, tax forms, summons and notices of lawsuits, or official government correspondence

You can be your LLCs registered agent if you choose to or designate the role, as long as you or the person/entity you have elected meets all registered agent requirements: being 18 years of age or older, having a physical address in the business’s location, and having unfettered availability during normal business hours.

Check out the complete LLC cost breakdown in this complete guide.

Best LLC Services

While business owners can file LLC paperwork independently, many find it safer to let a reputable LLC filing company do the work for them. These companies ensure that the filing process follows the correct procedures and that owners complete the correct forms when creating their LLC business entity.

Some well-known and reputable LLC filing companies include:

· IncFile

· Inc Authority

· Swyft Filings

· Harbor Compliance

· Corpnet

· Legal Zoom

· Rocket Lawyer

· ZenBusiness

· BizFilings

Each LLC filing company has its unique advantages and disadvantages. Whatever LLC filing company you choose to go with, make sure that they possess the right track record helping businesses in your niche, free services and trial periods to help you decide if they are right for you, and affordable pricing in line with your budget.

Learn more on the best LLC service online.

Running an LLC

The primary steps to forming an LLC are:

· Choosing a business name

· Filing Articles of Organization

· Choosing a registered agent

· Getting a Certificate from your home state

· Deciding on manager vs member management

· Creating an LLC operating agreement

· Getting an Employer Identification Number

· Registering your LLC out of state

· Filing annual reports and paying Annual Franchise Tax to the Franchise Tax Board

Remember, the name you choose for your LLC must comply with your home state’s regulations, which differ from state to state. Common to all states is the following:

· The LLC name must not be the same as the name of another business entity or LLC in your home state.

· The name of your LLCs must end with an LLC designator or its abbreviation.

You must then file Articles of Organization with the Secretary of State’s office in your home state. Some states (Delaware, New Hampshire, Mississippi, New Jersey, and Washington) call these documents Certificates of Formation, while others (Massachusetts and Pennsylvania) call them Certificates of Organization. The filing fees for Articles of Organization are approximately $100.

The next step involves choosing a registered agent from within the LLC or designated from outside the LLC. These agents must have a physical street address within the LLC’s home state. Once this step is completed, LLC owners must decide whether to manage their companies directly or appoint managers to manage the business for them.

Another consideration in running an LLC is the creation of the Operating Agreement. Although this document is not mandatory in most states, an operating agreement is vital because it establishes how you and other members will run and manage the LLC. If there is no operating agreement, state law kicks in to govern how your LLC will operate.

Check out our guide to offshore LLCs here.

Finally, LLCs must comply with their home state tax and regulatory requirements. Business owners must get the necessary business licenses and permits and an EIN (IRS Employer Identification Number). EINs are mandatory even if an LLC does not have any employees or is a single-member LLC.

However, if it does not have an EIN, it can be taxed as a corporation instead of a sole proprietorship. Other tax requirements include Sales and Employer Taxes.

LLCs will need to file Annual Reports within their home state, costing as little as $50 in Arizona, $250 in Alaska, $500 in Maryland, and as much as $800 in California. If you want your LLC to do business in another state other than your home state, you will need to register the LLC in that state and appoint a registered agent, which could cost you more.

LLC Personal Assets Protection

One of the primary reasons people opt for LLCs over corporations and partnerships is personal provision for assets protection. An LLC separates owners’ personal assets from their businesses in case of legal claims, business creditors’ claims, or lawsuits, keeping them safe.

If an LLC runs into financial problems and cannot pay its bills or debts, the LLC’s business creditors can only attempt to recover their money from the LLC’s bank account and other assets and not the owners. It follows that an LLC’s owner only risks the number of assets or money they have invested in their business and not more.

There are, however, exceptions. LLC owners are still liable for bills and debts they have personally guaranteed and unpaid payroll taxes. LLC owners are also still responsible if sued for their own wrongdoing.

To protect an LLC further, owners should take out LLC insurance. This insurance protects the owner and the business from accusations of wrongdoing and court judgments, which can be financially punitive, and even lead to the shutdown of the business.

Learn more about LLC personal asset protection or LLC Bankruptcy.

Best Business Bank Accounts for an LLC

LLCs need a bank account to separate personal and business finances, creating the required legal distinction between the owner and the company, limiting the owner’s liability.

These accounts are not mandatory, but they do help to sustain the liability protections of LLCs. In addition, these accounts help to streamline bookkeeping and taxes, making it simple to run your business. Separate business accounts for LLCs also make it easier for your business to apply for a line of credit or business loan, which it may need in the future.

LLC bank accounts are available at national and regional banks, credit unions, and digital banks. Some of the most well-known LLC business accounts include:

· Bank of America Business Advantage Fundamentals

· BlueVine Business Checking

· Capital One Spark Business Basic Checking

· Chase Business Complete Banking

· Lending Club Tailored Checking

· Novo Business Checking

· Oxygen Business Account

· Wells Fargo Initiate Business Checking

Check out our complete guide on the best business bank account for LLC.

Dissolving an LLC

Dissolving an LLC is the process of winding down your company. Certain procedures must take place to avoid making it a disregarded entity.

Below is an outline of the steps you must follow to dissolve an LLC legally:

· Obtain the written consent of a majority of the members after a vote.

· Wrap up the company business by completing tasks such as disposing of assets, handling legal disputes, discharging liabilities, and distributing business assets to members. During this stage, the LLC cannot trade.

· Notify all concerned stakeholders that the dissolution process for your LLC has begun. Concerned parties include employees, vendors, suppliers, creditors, debtors, property owners, and insurance providers. It also includes the Internal Revenue Service (IRS).

· Settle any financial and legal claims, including debts.

· File final taxes with the local state tax department and obtain a certificate of clearance.

· File Articles of Dissolution.

· Terminate out-of-state registrations

The dissolution of your LLC can also be involuntary. This can occur if the Secretary of State proclaims the dissolution of the LLC fails to pay taxes for two or more years.

Learn how to dissolve an LLC.

LLC FAQ

What is an LLC?

A limited liability company (LLC)is a legal entity and business structure in the United States that offers its owners personal liability protection, protecting owners from personal responsibility for debts, liabilities, and legal claims.

An LLC can be a domestic LLC (operating in its home state) or a foreign LLC (operating outside its home state). It can also be a single-member or multiple-member LLC. In LLCs, the owners’ personal income and assets are separate from business income and assets.

What state should I start my LLC in?

It is advisable to start your LLC in your home state, i.e., where you intend to locate your business. While there are no exceptional advantages to registering your LLC outside your home state, it is a good idea to explore the benefits other states offer to see if it is worth registering your business in those states.

For instance, in Delaware, a Chancery Court deals with only business cases, resolving them quicker. There are no taxes on business income, inheritances, and capital gains in Nevada, making it an attractive state to business owners.

However, consider that forming an LLC (Limited Liability Company) in a location other than your home state may incur additional filing fees.

Guide on the best state to start an LLC

Do I need insurance for an LLC?

Yes, insurance for an LLC is advisable, as LLCs do not offer unlimited personal liability. A liability insurance policy shields your personal assets when the limited liability protection cannot. In addition to protecting personal assets, liability insurance can also protect the company assets from expensive legal claims and lawsuits, where LLC owners pay out of pocket.

However, your LLC will not have any protection if it cannot pay its bills. Commercial insurance typically does not protect the company or personal assets from unpaid business debts. This is the case whether or not the owner personally guarantees the debts.

Check here for our guide on LLC business insurance.

Why is an LLC good?

An LLC is good because it provides a provision that protects your personal assets from claims against the business, such as lawsuits and creditor claims. This limits the liability to the business’s resources and does not transfer this liability to the owner. LLCs also provide significant legal and tax flexibility to the owner and the business.

What information about an LLC is public?

The Secretary of State’s office holds all public records about the LLC on its LLC register. This information includes the ownership of the LLC (lists of the names of the members) and their addresses. In case of legal trouble, it would be helpful to register your LLC at a separate address from your home address.

Do LLCs get a tax break?

Yes, LLCs do get a tax break. Owners can write off taxes on expenses such as rent, charitable giving, meals and entertainment, insurance, and the cost of goods sold.

How do LLCs protect personal assets?

LLCs protect personal assets through a provision known as limited liability protection. This provision separates personal and company assets. If, for instance, the LLC can’t pay its debts, its creditors can go after the LLC’s assets and bank accounts but cannot touch the owners’ personal assets like homes, cars, bank accounts, and other movable assets. A sole proprietor, for instance, does not have this protection.

Are LLC members employees?

No, generally, LLC members are not employees of their company. They can also not receive personal income in the form of salaries or wages and file personal income tax returns. In an LLC, the members get personal income and pay personal taxes out of their share of the LLC’s profits.

Can LLCs invest in stocks?

An LLC, just like an individual, can buy stocks and be an investment vehicle for its owners. However, an LLC cannot issue stocks.

Can an LLC own another LLC?

Yes. An LLC can own another LLC. LLC owners can be individuals or business entities. It is also possible to form a single-member LLC owned by another LLC.

What happens to an LLC when a member/members die?

When a member or members in an LLC die, their share transfers to their estate via their will or following state intestacy laws in cases where there is no will. In a single-member LLC, the LLC survives its owner beyond death, and the next of kin inherit the deceased’s member share interest.

This happens even if there is no will and is only invalid if the LLC’s operating agreement prohibits it.

Are there any age requirements when forming an LLC?

No, minors can be members of an LLC. However, some states prohibit minors under 18 from serving as organizers when forming LLCs.

When forming an LLC, do I need a lawyer?

You do not need a lawyer to form an LLC and can do the whole process yourself. However, it is advisable to use a lawyer in some instances, especially if the LLC will have outside investors or multiple members.