What is an LLC & Why Form An LLC?
LLC is an abbreviation for limited liability company. It’s a business structure that provides a business with limited liability (similar to a corporation), but the structure is easier to establish and simpler to maintain. It also provides the business with pass-through treatment of income for tax purposes, similar to that of a sole proprietorship or a partnership.
Owner’s limited liability
This is where the term “limited liability” in LLCs comes from. The LLC provides protection to the LLC owners by limiting the owner’s personal liability. Generally, this means that business debts owed by the business, and other claims on the business, including liens and lawsuits, are limited to the assets of the business itself. Those holding such liens against the business cannot pursue the personal assets of the business owner(s) in most states and under most circumstances.
This protection, however, does not extend to illegal acts committed by the owners of the LLC, and can also be lost in the case of certain instances of negligence on the part of the owners.
Pass-through treatment of income taxes
Unlike a corporation, an LLC is not considered to be a distinct entity for income tax purposes. The owner(s) of the LLC report their operating results, including profit or loss, on their personal income tax returns, just as they would as either a sole proprietorship or partnership. No return is filed specifically for the LLC.
How to set up an LLC
Setting up an LLC is a pretty simple process, especially compared to setting up a corporation. It’s actually a multistep process that looks something like this:
Choose a business name
There are two considerations here, the first being to choose a name that doesn’t duplicate that of an existing LLC in your state. Your state will let you know if the name you choose is acceptable.
The second consideration is that your business name must comply with state regulations in regard to LLC names. Generally, this means that “LLC” or “limited liability company” must appear in your business name. There may be other requirements depending upon the state where you are attempting to establish your LLC.
Create and file Articles of Organization
The name of this document may be slightly different from one state to another, but it is the basic document that establishes your LLC.
The article can be quite simple—in fact, your state may have a standard form that will enable you to fill in blanks. The information requested will be simple and basic, such as your LLC’s name, address, and typically the names of the owners of the business. In some cases, each owner will be required to sign the document, but in others a single owner can be appointed to sign alone.
Appoint a Registered Agent
Most states require that one person act as the registered agent for the LLC. The registered agent is the person representing the LLC and is designated to receive any legal documents relating to a lawsuit. A registered agent is typically one of the owners of the LLC.
Payment of required fees
The amount of fees required to register your LLC will depend upon the state where you live. It can be as little as $100 in some states, to several hundred dollars in others.
Publish a notice of intent to create an LLC
This is a requirement only in some states. Your state may require that you publish a legal notice in a local newspaper announcing your intent to form an LLC. The newspaper staff should be able to assist you in creating this notification. You may be required to publish the notice several times over a period of weeks or months, after which you may have to file an affidavit of publication with the state.
If you need to launch your LLC quickly, publishing this type of notice can delay the process. Be sure to check with your state to see if this is a requirement, and, if it is, allow plenty of time to meet the requirement.
Create an LLC Operating Agreement
This is probably the most complicated part of creating an LLC, but the good news is that the document is not necessarily required to be filed with the state. Still, you should create an operating agreement for your LLC to avoid conflicts later.
Even this document can be relatively simple, and does not necessarily need to be prepared by an attorney (though it’s never a bad idea in the case of an LLC with multiple owners).
The purpose of the operating agreement is to spell out the rights and responsibilities of each owner of the LLC. It is very similar to corporate bylaws or to partnership agreements, which are largely intended to provide a framework to deal with conflicts or with the transfer of ownership between partners, both existing and new.
The operating agreement should provide for owners’ rights and responsibilities, voting power, percentage interests in the business (including division of profits and losses), and the scheduling of owners meetings. A very detailed operating agreement may even include management responsibilities between several owners.
The agreement can be as detailed as you need it to be, but it’s a necessary document if there is potential for any disagreement between owners over either the ownership or management of the LLC.
And don’t be intimidated by the form requirements, either. You can often get them from your state offices, or through a general web search (just make sure they’re specific to your state). Failing all else, you can always check out LegalZoom.com, or one of their competitors, for low cost pro forma legal documents.
Also, Read How to Buy Rivian Stock in 2022.
Reasons For The Formation of An LLC
Limited liability companies (LLCs) are usually the best business structure for small businesses. 5 of the most important reasons to form an LLC:
Personal liability protection
Any business that assumes risk or liability needs limited liability protection. The main reason for forming an LLC is that it provides members with personal liability protection. This means that an owner is not at risk of losing personal assets if the LLC incurs debt or is sued. Sole proprietorships and general partnerships do not offer personal liability protection.
However, owners can lose their protection if they do something that pierces the LLC’s corporate veil. Some ways an LLC member can lose personal liability protection are by commingling personal financial accounts with business accounts and committing fraud. This is one reason why it is important to open a business bank account.
As your business grows, it will benefit from flexible tax options. The default tax structure for LLCs is “pass-through taxation” This means that the LLC’s profits and losses are not subject to corporate income tax and instead are included in each member’s individual tax return and taxed at the owner’s personal tax rate. Pass-through taxation allows owners to avoid double taxation, which is not the case with corporations, which must pay corporate income tax, while owners must also pay taxes on dividends received.
LLCs can also elect to be taxed as a C corporation (C corp) or as an S corporation (S corp), which can be beneficial depending on the specific situation of the business. Visit our guide to choosing a corporate structure to learn more.
LLCs are easy to form and manage, which means you can focus on growing your business instead of going through the administrative hurdles of a corporation. You can form an LLC yourself without involving an attorney. However, if you are not entirely comfortable going through the process yourself and want professional help, we have compiled a list of the best LLC services that can assist you.
LLCs are also less regulated than corporations and have much less paperwork. LLCs do not have to have a board of directors, keep meeting minutes, or hold shareholder meetings. This means you’ll spend much less time and money keeping records and filing compliance documents after you have formed the company.
LLCs are a low-cost business structure that offers more benefits than any other structure. Compared to corporations, the cost of forming and maintaining LLCs is lower. The main cost of forming an LLC is the filing fees, which range from $40 to $500 depending on the state. You do not need an attorney to form an LLC, which is a significant cost savings. Also, once the LLC is formed, you usually have less paperwork to complete, which means fewer filing fees.
Sole proprietorships are inexpensive up front, but they do not protect your personal assets (which can be financially devastating in the long run)
Small businesses always benefit from the credibility that a limited liability company provides LLCs lend more credibility to a business than a sole proprietorship or partnership. Customers and other businesses will find an LLC more credible, and forming an LLC can show that you take your business seriously.
If you are thinking about starting a business, you should consider forming an LLC. LLCs offer many benefits, including limited liability
How an LLC can benefit a small business
Probably the most obvious advantage to forming an LLC is protecting your personal assets by limiting the liability to the resources of the business itself. In most cases, the LLC will protect your personal assets from claims against the business, including lawsuits.
This enables the small business owner—of sole proprietorships and partnerships—to gain the limited liability protection similar to that offered by corporations, but without the cost and complexity that corporations bring. For example, under an LLC, you will not need to file a separate tax return for your business. Your income and expenses will continue to be reported on your individual income tax return, either on Schedule C for sole proprietorships, or on Schedule E for partnerships.
There is also the tax benefit to an LLC. This is particularly true in relation to “C corporations,” which the IRS recognizes as independent entities. Taxes must first be paid on net income to a corporation, before that income is distributed to the owner, where it is taxed again at an individual level. This is what is known as double taxation, which you can avoid entirely with an LLC. (You can also avoid it with a Subchapter S Corporation but that will still involve a complicated set up, as well as ongoing compliance and filing requirements.)
Still another benefit is something of a soft advantage: having “LLC” or “Limited Liability Company” in your business name can make your business seem somehow more official. It implies that the business is registered with the state, and is somehow more substantial as a legal entity.
If you have a small business, either a sole proprietorship or partnership, you should take a serious look at creating an LLC. That will enable you to gain important legal protection for your personal assets, without disturbing the management and income flow of your business.
In Addition Also Read 10 Best Places To Buy Cheap Office Supplies?
- What are the advantages of an LLC?
The advantages of an LLC include personal liability protection, tax flexibility, simple formation process, reduced administrative burden, management flexibility, distribution flexibility, low ownership restrictions, fee schedule, and the credibility they can give a business.
- How do LLC owners get paid?
LLC members are paid differently depending on the tax structure of the LLC. Read our article How do I pay myself from my LLC? for more information.
- Is an LLC better for taxes?
For some businesses, LLCs are tax advantageous, but not for all. Read our LLC tax guide for more information.
- Do LLCs pay more taxes than sole proprietorships?
LLCs and sole proprietorships have the same standard tax structure. However, LLCs also have the option to elect S-Corp tax status, which may result in them paying less tax than a sole proprietorship, depending on the situation
- Do I need an LLC if I am self-employed?
You do not need an LLC if you are self-employed, but we recommend forming an LLC instead of a sole proprietorship because LLCs offer many advantages.
- How is an owner’s profit taxed in an LLC?
An LLC owner must pay self-employment taxes on its owner’s withdrawals or distributions (FICA).
- How do I form an LLC?
You can easily form an LLC yourself using our free guide to forming an LLC, or you can hire an LLC formation service to register your LLC for you.
- How much does an LLC cost?
The main cost of forming an LLC is the state registration fees, which range from $40 to $500 depending on the state. If you choose to use a professional service to help you with the formation process, there will be additional costs.
- How are LLCs taxed?
LLCs are taxed differently depending on their structure. Taxation depends on whether you operate a single-member or multi-member LLC, as well as the tax structure of your LLC
- What is pass-through taxation?
Pass-through taxation is a tax system that generally applies to sole proprietorships, partnerships, LLCs, and S-Corps. Under this system, the profits or losses of the business are not taxed at the corporate level. Instead, they flow through to the owners’ personal tax returns and are taxed at the owners’ personal income tax rate.
- Where should I form an LLC?
You should form your LLC in the state where the company is located or does business. Certain states may have more business-friendly laws and policies, but it becomes more complicated if the business is not located there.
- Do I need an attorney to form an LLC?
You typically do not need an attorney to form an LLC. You can easily form an LLC yourself using our free guide to forming an LLC, or you can hire an LLC formation service to register your LLC for you.
- Is it better to form an LLC or a DBA?
Whether it is better to form an LLC or a DBA company depends on your individual situation and the needs of your business. A DBA is a business name and many sole proprietors choose to use a DBA name. With an LLC, you do not need a DBA because when you form an LLC, your legal name is registered with the state.