When it comes to starting your business, there are many legal structures to consider. One of the most popular business structures, is known as a Limited Liability Company or LLC. An LLC is a legal entity that gives business owners added benefits compared to a sole proprietorship or general partnership and helps protect owners personal assets.
In this introductory guide, we'll cover everything you need to know about LLC's, as well as who a limited liability company ideal for, and other factors to consider when choosing your business structure.
What is a limited liability company (LLC)?
Limited liability companies (LLC) are defined as a type of business structure where owners of the LLC are called “members” and are partners in a business entity with all the protection of a corporation plus the ability to pass through any business profits and losses to their personal income tax return. LLC's differ from a sole proprietorship for example, in that LLC's ensure there is reduced personal liability, in case your business faces legal issues in the future.
Many business owners choose an LLC, because they want the liability protection a corporation can provide in a business, without the double taxation. LLC members can be an individual business owner, several partners, or other businesses.
The Pros of a Limited Liability Company (LLC)
There are several benefits of establishing a legal entity such as an LLC:
- LLC members are not personally liable for business decisions or actions taken by the LLC, helping protect against personal liability and personal assets of LLC members, in the case of legal consequences.
- The business’s profits and losses can be shared amongst the members however they prefer to divide them; it doesn’t have to be equal, though everyone claims their profits and losses on their personal income tax return. LLC's can also help make it easier for federal income tax purposes and ensure you are on the right side of the law with the internal revenue service.
- There is much less paperwork required to create and maintain an LLC by comparison to a Sub Chapter S corporation, which is similar in many ways to an LLC.
- LLC's are customizable beyond standard LLC agreement. For example, through an LLC operating agreement members of an LLC customize various terms to be more specific to the needs of the business. A written llc operating agreement can help make is clear who is responsible for what, which is an important legal component of building a business.
The Cons of a Limited Liability Company (LLC)
- In many states, if a member dies or leaves the LLC, the business entity must be and a new LLC created.
- Since members are considered employees of the LLC, they are responsible for paying their own self-employment tax contributions of 15.3%.
- LLC's do cost more to start and maintain compared to a sole proprietorship or general partnership. A basic LLC can cost anywhere from 300-500USD to get started. That said, the added protection of LLC owners is why it's a popular choice for a business entity.
- Equity and compensation can get a little complex and challenging with an LLC, so hiring outside legal counsel to ensure LLC owners are protected is widely encouraged.
How to form an LLC
Since an LLC is separate from you as an individual, you’ll need to choose a business name different from your own and that no other LLC in your state is already using. Your official business name should have “LLC” at the end, such as Designer Shoes Galore LLC.
After choosing a business name, you’ll need to complete and file Articles of Organization, which is a form that lists the company’s name, address, and all of the names of the members. Articles of Organization are typically filed with your state’s Secretary of State, but double check in your own state to be sure. Alaska, Hawaii, and Utah have no Secretary of State and in Massachusetts, Pennsylvania, and Virginia you’ll file with the Secretary of the Commonwealth. There is typically a filing fee to be paid as well.
Once you’ve filed the Articles of Organization, you’ll then need to apply for any business licenses and permits you’ll need to operate legally. Remember, as an LLC member, you'll want to ensure you
Finally, check with your state’s income tax authority to learn whether your state taxes LLC income. LLCs are not taxed at a federal level, but some states do tax LLC income so you want to double check the requirements to ensure you remain compliant with the internal revenue service (IRS.)
Is an LLC right for you?
Just because an LLC is a popular business structure for businesses, doesn't necessarily mean it's right for you. That said, operating your business as a separate entity can offer much needed peace of mind when growing your business.
If you're looking to ensure your personal assets are protected a limited liability company is a great option to consider.