When it comes to choosing a business structure, many single-owner start-ups register as LLCs rather than as sole proprietorships, and many multi-owner online businesses that could choose partnership status instead register as LLCs.
An LLC (limited liability company) is one of the most popular business structures in the US, with over 1 million LLCs currently in existence. The LLC structure supports you in multiple ways and offers you great protection to plan for the future. Let’s take a look at what an LLC is and what it can do for you and your business.
What is an LLC?
A limited liability company, better known as an LLC, is a popular legal form of business that combines the simplicity, flexibility, and tax benefits of a partnership with the personal liability protection of a corporation.
Some of the most critical features you should know about an LLC are listed below:
- Distinct legal entity
An LLC is a separate entity from the people who own and manage it, meaning that the LLC can enter into agreements, own property, and be held liable for any obligations in its own name.
- Liability of members
Owners of LLCs are called members, who are not personally liable for the debts or liabilities of the business. This means that if the LLC is unable to pay its debts, the member’s personal assets are protected.
- Tax structure
For tax purposes, LLC is treated similarly to either a sole proprietorship or a partnership, depending on the number of members. Alternatively, LLC members can file with the IRS to change their tax status to C corporation or S Corporation.
Pros and cons of an LLC
Structuring your business as an LLC may bring certain benefits, but there are also some potential drawbacks to consider.
Below is the list of prominent advantages and disadvantages of LLCs that you should be aware of:
- Liability protection for members
- Flexible tax treatments
- High level of privacy and asset protection
- Flexible ownership and management
- Ease of startup and maintain
- Limited investment option
- Additional tax burden
- High maintenance cost
- Loose internal governance
Who should form an LLC?
LLCs are widely used by small business owners, including those in the fields of consulting, technology, manufacturing, and retail. Many professional service providers such as doctors and lawyers also prefer to form an LLC for its asset protection benefits.
Some famous companies that are structured as LLCs include Ben & Jerry’s, The Container Store, Kellogg’s, and Publix.
Is it right for you?
LLCs can be a powerful tool for protecting your assets in certain situations. For example, if you’re a consultant who works with high-net-worth clients, forming an LLC can help shield your personal assets from any potential lawsuits that may arise from your professional activities.
This type of structure can also be valuable for business owners in the building sector, protecting you from personal liability in the event of a construction accident. Or if you’re a property owner who holds and manages rental property, an LLC can insulate your personal assets from any potential liability that could arise from the ownership and operation of the rental property.
Some businesses, such as banks and insurance companies, cannot be formed as LLCs. For more information, consult the state’s requirements as well as the federal tax regulations.
Should you start an LLC in the US? Take our quiz from US Business Entity Selection Tool to find out!
Common ways to structure an LLC
The two most common ownership structures of LLCs in the US are single-member LLCs and multiple-member LLCs.
As the name suggests, a single-member LLC is owned and managed by one person. From a legal perspective, single-member LLCs are not much different from sole proprietorships.
A single-member LLC will be considered a “disregarded entity” for tax purposes, which means all the profits, losses, and tax liabilities will be channeled to the sole member.
A multiple-member LLC is owned and managed by two or more people, which is similar to a partnership.
Multiple-member LLCs can elect to be taxed as either a partnership or a corporation (S corp or C corp). If the LLC does not make this election, it will be taxed as a partnership by default.
Other LLC structures
Additional types of LLCs will vary by state and are listed below:
- Series LLCs
- Domestic LLC and Foreign LLC
- L3C Company (low-profit LLC)
- Anonymous LLC
- Restricted LLC
- PLLC and LLC
How to form an LLC?
Generally, you can start an LLC in 5 simple steps:
Step 1: Choose the state to register your LLC
Step 2: Name your company
Step 3: Appoint a registered agent
Step 4: File Articles of Organization
Step 5: Complete post-registration filings
The first step is the most crucial because it lay the basic foundation for your business establishment and growth. Your chosen state will determine which law will govern your LLC, the tax rate you’re going to pay, and what ongoing compliance requirements you’ll need to meet.
Various factors can affect your decision, including the type of business you’re running, your target market, business regulations, and taxation.
For most businesses, it makes sense to register the company in a state with business-friendly laws and tax regulations. Some of the most popular states for LLC formation are Delaware, Nevada, Wyoming, and Florida.
An LLC can be a great way to protect your personal assets while enjoying the benefits of a corporate structure. It’s important to choose the right state for registration and to understand the ongoing compliance requirements. Once you’ve done that, you can follow the simple steps to form your LLC.
If you need help with forming your LLC in the US, feel free to get in touch for practical advice and consultation. Drop us a message via firstname.lastname@example.org and we’ll be more than happy to help.
Frequently Asked Questions
What is a series LLC?
A series LLC is a type of LLC that is composed of a group of individual members, each with its own distinct assets, liabilities, and management structure. Series LLCs are often used for holding multiple properties, such as rental properties or investment portfolios.
How much does it cost to form an LLC?
The cost to form an LLC will vary by state. Key costs to keep in mind for LLC registration include
- Filing fee for the Articles of Organization, typically around $40 to $800
- Registered agent fee, typically around $50 to $500 per year
What are the benefits of forming an LLC?
LLCs offer a number of benefits for business owners, including limited liability protection, flexibility in management structure, and various tax treatment options. LLCs are also relatively easy and inexpensive to set up and maintain.
What is an LLC operating agreement?
An LLC operating agreement is a legal document for running an LLC, helping to prevent misunderstandings and disagreements among members by establishing clear rules and authority within the company.
This type of agreement is not required in all states, but it’s highly recommended that you have one.
You can create an agreement in different ways. For instance, an LLC operating agreement in Delaware can be established by using a customizable template, or by working with an attorney.
How long does it take to form an LLC?
The LLC formation process typically takes around 2 to 4 weeks, depending on the state in which you’re forming the LLC. Some states, such as Wyoming and Delaware, have faster processing times than others.
Do I need an EIN for my LLC?
You will need an EIN (Employer Identification Number) for your LLC in the following circumstances:
- You plan to have more than one member
- You’re hiring employees and staffs, or
- You’re opening a business bank account.
Disclaimer: While BBCIncorp strives to make the information on this website as timely and accurate as possible, the information itself is for reference purposes only. You should not substitute the information provided in this article for competent legal advice. Feel free to contact BBCIncorp’s customer services for advice on your specific cases.
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