What is an LLC

Learn everything you need to know about limited liability companies (LLCs).

Form Your LLC With Wise Business Plans Today

An LLC is the simplest way to protect your personal assets in the event that your business is sued.

LLCs combine the best features of corporations, sole proprietorships, and partnerships into one business entity that offers owners liability protection, flexibility in management, and tax benefits.

What is an LLC?

LLC stands for “limited liability company”. LLCs protect owners from personal liability for the company’s debts and liabilities. An LLC is a type of legal entity that can be formed to own and operate a business. An LLC provides the same limited liability as a corporation, however, an LLC is simpler and affordable to form and run.
  • A limited liability company protects its owners from the company’s debts and liabilities.
  • LLC regulation differs from state to state.
  • A member of an LLC can be an entity or individual except for banks and insurance companies.
  • Taxes are not paid directly by LLCs. Profits and losses are passed through members who report them on their individual tax returns.
In many cases, a limited liability company provides the right mix of asset protection and simplicity. There can be multiple members of an LLC. An LLC with a single owner is called a single-member LLC and one with more than one owner is called a multi-member LLC.

Who Should Form an LLC?

A person starting or operating a business as a sole proprietor should consider forming an LLC. You should consider this particularly if you want to limit your liability and protect yourself from business losses and lawsuits. LLCs can be used for almost any type of business. Some states, however, require certain types of professionals to form specialized LLCs. The LLC can be used for any size of business, from small, one-owner operations to large, multi-owner companies. A LLC is also the most common type of legal entity used to own rental and commercial property.

Advantages of an LLC

The following are six of the benefits of starting an LLC and why limited liability companies have become so popular among small businesses.

  • Limited liability protection

LLC owners are not responsible for the debts or lawsuits of the LLC if there is no fraud or criminal behavior involved. This is often referred to as personal asset protection.

An LLC limits personal liability because it is legally separate from its owners.

  • Tax Flexibility 

    Although LLCs do not have their own federal tax classification, they can adopt the status of sole proprietorships, partnerships, S corporations, and C corporations. A popular option is to be taxed as an S corporation. An S corporation is technically a tax designation, not a type of business entity.

    Read our guide on the differences between LLC and S corporation for more information on choosing the right tax designation for your business.

  • Pass-Through Taxation

    LLCs are pass-through entities, which means their profits are passed through directly to their members without being taxed by the government. Members pay federal income tax on their profits.

    This makes filing business taxes easier than if you were taxed as a corporation. If your business loses money, you and other members can shoulder the burden on your own tax returns.

  • Flexible Profit Distributions

    It is up to LLCs how they distribute their profits to owners, and they don’t have to do it equally or according to ownership percentages.

    It is possible for two people to have equal interests in an LLC, but they can decide that one will be entitled to a greater share of the profits since he or she contributed more money or labor during the startup phase.

    However, corporations must distribute profits to shareholders in accordance with the number and type of shares they own.

  • Simple Setup & Maintenance

    Limited liability companies are relatively easy to set up and maintain with little paperwork. LLCs do not have to hold annual meetings, assign officers, or record minutes and resolutions, unlike C corporations.

  • Credibility

    Forming an LLC to own and run your business gives you credibility. Customers can be assured that they are dealing with an established company. Additionally, you will have an official business name to use.

  • Management Flexibility

    When it comes to ownership, management, and taxation, LLCs offer enormous flexibility. An LLC can have an unlimited number of owners, also known as members. Some LLCs have only one member, but LLCs can have five, ten, or hundreds of members.

    • Multi-Member LLCs can be managed by their members or a manager.
    • Member operated LLCs are known as member-managed LLCs.
    • Manager-operated LLCs are called manager-managed LLCs.

What Are the Disadvantages of an LLC?

Let’s flip the coin and see the possible disadvantages of an LLC. 

  • Forming is expensive

    An LLC generally costs more to form and operate than a sole proprietorship or a partnership. LLC formation requires filing fees.

    Upon forming an LLC, state fees and taxes must be paid. The fees differ from state to state but can reach $800 per year or higher for highly profitable LLCs.

  • Investment Disadvantages

    Businesses that seek outside investors do not benefit from LLCs. This is especially true if you’re trying to secure funding from venture capitalists, who typically only fund corporations. Incorporated companies are better suited for outside investments since stock can be issued to investors in exchange for their funds. In an LLC, investors can purchase ownership interests, but it is more complicated than with a corporation.

How To Form an LLC?

It is easy to form an LLC. To form your LLC, you first file articles of organization with secretary of state’s office. Each state has its own requirements for forming an LLC. Choose your state from the list below to learn more about how to form an LLC in that state.

It is possible to form an LLC yourself by following the steps below or to use the LLC formation services of wise business plans and let us handle all the hassle of forming an LLC for you.

Six Steps to Create an LLC

  1. Select Your State
  2. Name Your LLC
  3. Choose a Registered Agent
  4. File the Articles of Organization
  5. Create an Operating Agreement
  6. Get an EIN
How to Form an LLC

Choose Your State

For detailed instructions on how to form an LLC in your state, choose your state below

Give Your LLC a Name: When you prepare your LLC’s formation documents, you will need to give your business a unique name that can be distinguished from all other business names registered in your state.

Lean how to name your business in our how to choose a business name guide.

Select an LLC Registered Agent: On behalf of your LLC, your registered agent will accept legal documents and tax notices. When you file your LLC’s articles of organization, you’ll list your registered agent.

Learn more about choosing a registered agent in our What is a Registered Agent article.

File Your LLC’s Articles of Organization: An LLC’s Articles of Organization, also known as a Certificate of Formation or Certificate of Organization in some states, is the document you must file with the state to officially form your LLC. You can fill out the information on the LLC formation documents yourself (online or by mail) or hire an business formation service to do the work for you.

An LLC Operating Agreement must be created: The LLC operating agreement outlines the responsibilities of members and ownership of your LLC.

Get an EIN or Transfer an Existing EIN: The Internal Revenue Service (IRS) uses Employer Identification Numbers (EINs) to identify and tax businesses. An EIN is like a Social Security number for businesses.

With Wise Business Plans Business Formation Service, you can complete all the paperwork and formalities required to start a limited liability company online.

What is an LLC FAQ

Your business structure will be based on its specific characteristics and needs. Some businesses might be better off choosing an LLC structure, while others might prefer a partnership or corporation.

For help choosing the right business structure for your small business, read our guide on Business Structure.

The primary reason to start an LLC is to protect your personal assets. In other words, if the LLC goes into debt or gets sued, the owner is not at risk of losing their personal assets.

Unlike a sole proprietorship, an LLC is a separate entity from its owner. The most common reason sole proprietors should convert to LLCs is that LLCs provide liability protection and maintain relatively low costs.

A sole proprietorship is suitable for micro businesses, consultants, craftsmen, handymen, etc. Still, when you grow, you will need a different business structure to facilitate business growth. 

For more details, please see our LLC vs Sole Proprietorship guide.

Depending on your state, the cost of forming an LLC may vary. A minimum of $50 to $500 is required to form an LLC and $100 annually to maintain the LLC.

If there is one member in an LLC, the LLC is taxed as a sole proprietorship, while if there are multiple members, the LLC is taxed as a partnership. However, LLC owners can select to have their LLC taxed as a C corporation or S corporation. This requires filing an election with the IRS.

It is usually best to form an LLC in the state where your business is located. There are generally no great advantages to forming your LLC in another state.

The registered agent is the person or business authorized to receive and send legal documents on behalf of your LLC. Most states require you to name a registered agent when you form an LLC. A registered agent is also known as a resident agent or agent for service of process in some states. Learn more about registered agents in our article.

A standard processing time for forming an LLC is two to three weeks from the moment the state receives the formation documents. Many states offer same-day or expedited LLC formation.

As opposed to corporations, LLCs are not required to have a board of directors. Normally, LLCs are managed by their members, unless the articles of organization appoint a non-member manager to manage the LLC.

There are no shareholders in LLCs and they cannot trade on the stock market. A limited liability company is owned by its members, who split. Your Operating Agreement should specify how your LLC's earnings will be divided.

You can form an LLC in another state. You will need to form a foreign LLC if you already have a domestic LLC and want to expand your business to another state. It is generally not recommended to form an LLC in a state where you do not intend to conduct business.

Get in Touch

Contact Us Today For A Free Consultation

Related Articles