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Everything You Need to Know About LLCs
Below, we cover what a limited liability company is, who should consider forming one, and the pros and cons you should know. Consider this your guide to getting your LLC and business structure up and running in no time!
Everything You Need to Know About LLCs
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?
Selecting the appropriate entity type for your business holds significant weight, shaping the regulatory framework you'll operate within and impacting your tax obligations. But which organizational structures align best with a limited liability company? LLCs are particularly suitable for sole proprietorships or multi-member enterprises aiming to safeguard personal assets and optimize tax liabilities compared to C-corps. At UsFilers, we encounter a diverse array of businesses opting for LLC status, ranging from real estate agencies, financial consultancies, coffeehouses, and mobile eateries to independent professionals like personal trainers, bloggers, writers, influencers, and even cannabis ventures. Home-based enterprises also find a natural fit within the LLC model, experiencing substantial growth in recent times.
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 entity quiz 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.
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.
Pros
Limited Liability Protection
Pass-Through Taxation
Member-Managed LLC
No Ownership Restrictions
Flexible Profit Distribution
Minimal Compliance Requirements
Versatile Tax Status
Cons
Self Employment Taxes
Careful Personal Records
LLC Termination
Banking
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.
This may include standards for LLC governance, ownership parameters or rules around member changes.
Failing to do so can result in the dissolution of your business.Annual and Biennial Reports
This includes incorporation paperwork fees, annual fees, personal taxes, franchise tax and any applicable business license fees. Filing Fees
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 member.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
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.
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.
As an owner of an LLC, you hold the title of a member, and LLCs can accommodate anywhere from one to several thousand members. Discover the process of adding members to your LLC with UsFilers.
To effect any alterations to your LLC, filing an amendment is imperative, which involves reaching out to your Secretary of State. While not all modifications require an amendment, typically, any adjustments to your articles of incorporation or organization mandate filing. Streamline the process by filing Articles of Amendment with UsFilers.
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.
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.
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.
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UsFilers can easily help you form your LLC.