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What Is an LLC?
An LLC, or limited liability company, is a business entity type that allows business owners to take advantage of the taxation of a sole proprietorship and the liability of a corporation.
If that definition made your brain hurt — you aren’t alone. LLCs are complicated, but with a team like us at your side, you’ll be able to navigate the complexities of starting a business with ease. Let’s start by breaking it down.
In layman's terms, an LLC offers the best of both worlds for business owners as it simplifies the tax process while separating your business’ assets, debts and liabilities from your own. This means you won’t be held individually liable for company debts or other responsibilities, but can still enjoy the ease of merging your business profits with your personal income for tax purposes.
Is Starting an LLC Right for You?
Choosing the right type of entity for your business is important, as it will determine the rules and regulations you’re bound to as well as how your company is taxed. But what types of business organizations are the best fit for a limited liability company?
Businesses that should choose an LLC include sole or multi-member companies whose owners are looking to protect their personal assets and pay less in taxes than they would as a C-corp.
At Bizee, we see all sizes and types of businesses forming LLCs — from real estate agents, financial advisors, coffee shops and food trucks to solopreneurs such as personal trainers, bloggers, authors, influencers or even marijuana businesses. Home-based businesses also make a great fit for LLCs and have seen a big boom in recent years.
Who Shouldn’t Form an LLC?
Businesses that cannot form an LLC include financial institutions such as banks, financial trusts or insurance companies, due to federal regulations. LLCs are sometimes limited for industries in certain states, too. For example, in California, architects, accountants and health care providers cannot form an LLC.
Check out specific LLC information by state for more details for your location.
In addition to some state law regulations preventing businesses from forming an LLC, some businesses just aren’t a good fit for this type of entity. These include:
Startups
Startups shouldn’t form an LLC as it can quickly complicate taxes. For example, many investors can’t invest in pass-through companies because of certain regulations. In addition, they often won’t want to combine their personal taxes with the businesses, which LLCs would require.
Nonprofits
A nonprofit organization may choose to form an LLC; however, it’s not typically recommended as the formation process is very complex. Many states have laws against forming a nonprofit LLC, and in addition, there are certain conditions set by the Internal Revenue Service (IRS) for nonprofit LLCs that must be met.
If you’re unsure about whether you should be forming a limited liability company or a different entity type, take our Business Resources or check out our overview of business structures to determine what type of business is right for you.
Benefits of an LLC (Pros vs Cons)
As any good business owner knows, weighing the pros and cons before making a decision is a must. Not only will this ensure you make the right choice for your company, but it will also help you anticipate roadblocks and stop problems before they start.
Below are some of the biggest pros and cons of forming a limited liability company.
The Pros
Creating your business as an LLC comes with a lot of benefits, such as a simplified tax process and minimal regulations. See all the pros of forming an LLC in the list below.
- Limited Liability Protection
The company — not the members — will be liable for any debts and liabilities incurred by the business.
- Pass-Through Taxation
Your business's net profits and losses are “passed through” to the personal income of the owner(s) of the LLC and are taxed as traditional income.
- Member-Managed LLC
LLCs allow you to form a member-managed system, where all members are equally operating the business themselves.
- No Ownership Restrictions
LLCs do not have any residency restrictions, meaning you have the ability to partner with foreign nationals.
- Flexible Profit Distribution
LLCs allow net income and profits to be allocated to members in proportion to their ownership levels.
- Minimal Compliance Requirements
LLCs are largely considered simpler and flexible, as they aren’t required to comply with the same state laws and regulations as corporations.
- Versatile Tax Status
LLCs can choose how they are treated as a taxable entity. In addition to the pass-through taxation mentioned above, LLCs may also elect to be taxed as an S Corp or C Corp.
The Cons
While the pros listed above may have just about sealed the deal, there are still some drawbacks of LLC formations that savvy business owners need to be aware of.
- Self Employment Taxes
Taxes reported as personal income are often higher than the taxes at a corporate level, meaning members may end up having to pay more.
- Careful Personal Records
Careful record keeping of all your business expenses is required as an LLC owner, and they must be completely separate from your personal finances.
- LLC Termination
If a member departs an LLC, the LLC is terminated and ceases to exist. However, if your company is a corporation, it would still exist regardless of which shareholders come and go.
- Banking
Keeping business and personal finances separate can be a daunting task. Banks usually charge a number of different fees and monthly expenses to maintain business accounts for this reason.
Understanding LLC Requirements
Unlike corporations, limited liability companies are not required to hold annual meetings or keep minutes, but there are certain LLC filing requirements you’ll need to keep in mind.
Every LLC should have an LLC Operating Agreement.
This may include standards for LLC governance, ownership parameters or rules around member changes.
LLCs are required to file annual or biennial reports with their Secretary of State.
Failing to do so can result in the dissolution of your business.
There are various filing fees associated with forming an LLC.
This includes incorporation paperwork fees, annual fees, personal taxes, franchise tax and any applicable business license fees. Filing Fees
When determining what to call your new company, you’ll need to follow state rules for naming your LLC.
If you’re having difficulty choosing a name for your business, use our free business name generator to help you find the perfect one. Or if you have one in mind, use Infile’s business name search to check for name availability in your state or in all 50 states. Rules For Naming Your LLC
Types of LLCs
In general, an LLC will operate as a Domestic LLC where it is formed and operates within your state, or a Foreign LLC where it operates in a different state than the one in which it was formed. Outside of these conditions, there are seven different types of LLCs to be aware of.
- Single-Member LLC
This is an LLC with only one member.
- Multiple-Member LLC
This is an LLC with multiple members.
- Member-Managed LLC
The most common type of LLC, member-managed LLCs allow all owners to operate the business with equal responsibility.
- Manager-Managed LLC
If some of your business partners want to remain passive in running the business, then you’d delegate one person to operate as the manager of the company.
- Series LLC
A Series LLC allows you to create an umbrella company that oversees a series of separate legal entities. This type of entity is only available in Delaware, Illinois, Iowa, Nevada, Oklahoma, Tennessee, Texas and Utah.
- Restricted LLCs
Restricted LLCs enter an operational agreement where they cannot make distributions among members until 10 years after forming. This type of LLC is only available in Nevada.
- L3C
An L3C company is a for-profit company with a stated philanthropic social purpose. It follows a hybrid business structure using the legal and tax flexibility of an LLC, social benefits of a nonprofit organization and marketing advantages of a social enterprise.
LLC Frequently Asked Questions
Is an LLC a corporation?
An LLC stands for Limited Liability Company and is therefore not a corporation. However, an LLC does have the same limited liability responsibilities as a corporation.
How does business asset protection work with LLCs?
One of the benefits of forming an LLC is that member assets are separated from that of the business. So if there’s a lawsuit, the LLC would be sued, not the members or owners. If the LLC is unable to pay the fees, other company-owned assets may be used to help pay down the debt.
Business asset protection helps protect the assets of the members, meaning the only thing the members own that’s at risk is the monetary investment they made in the company or any retained earnings.
What is an LLC member?
If you are an owner of an LLC, you are referred to as a member, and LLCs can have anywhere from one to several thousand members. Learn how to add LLC members with Bizee.
How do I file an amendment for an LLC?
If you need to make a change to your LLC, you'll need to file an amendment by contacting your Secretary of State. Not all changes need to be amended, but generally, any changes to your articles of incorporation or organization will need to be filed. File Articles of Amendment with Bizee.
Do I need to form an LLC to start a business?
If you begin operating as a business by yourself or with someone else you will be considered a sole proprietor or a partnership unless you specifically file for an LLC. However this can leave your personal assets vulnerable and for that reason we recommend forming an LLC. Learn how to convert your sole proprietorship into an LLC.
How do LLC owners pay themselves?
LLC owners pay themselves through “draws” or “distributions,” rather than paychecks. These types of payments don’t have income taxes withheld, so you’ll be responsible for reporting your share of profits on your tax returns. Learn more about how LLC owners are paid.
How do LLC taxes work?
LLCs can be taxed differently depending on whether they are sole proprietorships or have multiple members, and whether or not you elect to be taxed as a corporation. You can speak with your accountant for more information. Learn more about LLC taxes.