What Is an LLC?
Limited liability protects a business owner’s personal assets (e.g., car, house, and savings) in the event that a business is sued or defaults on a debt.
The main cost of forming an LLC is the state filing fee, which ranges between $40 and $500, depending on your state.
There are two options for forming an LLC:
Benefits of an LLC
Limited liability companies (LLCs) are usually the best business structure for small businesses. Here are some of the best benefits of choosing an LLC:
- Personal liability protection
- Tax options
- Inexpensive to form
- Easy to form
- Less paperwork
- Management flexibility
Personal Liability Protection
The main advantage of LLCs is that they provide members with personal liability protection. This means that an owner’s personal financial assets aren’t in danger if the LLC goes into debt or is sued. Sole proprietorships and general partnerships do not offer this protection.
However, keep in mind that owners can lose this protection if they do something to pierce the LLC’s corporate veil. This includes things like mixing personal finance accounts with business accounts and committing fraud.
A related advantage of LLC is the charging order. If one of the members has personal debts or owes a judgment from a lawsuit, their creditors may go after personal assets, which would include an ownership stake in any business. A charging order puts a lien on that member’s earnings from the LLC, but it protects the earnings and ownership stakes of the other members and also allows the indebted member to continue their role in the company without giving the creditor any power to run the business.
LLCs are subject to “pass-through taxation” by default, which means the LLC's profits and losses pass through to each member’s individual tax return and are taxed at the owner’s personal tax rate. As a pass-through entity, the LLC doesn’t have to pay any federal corporate income tax. This means that the owners can avoid double taxation, which is not the case for owners of corporations.
Visit our How to Choose a Business Structure guide to learn more.
Inexpensive to Form
LLCs are generally inexpensive to form and maintain. The main cost of forming a limited liability company (LLC) is the state filing fee. This fee ranges from $40 to $500, depending on your state.
Recommended: Visit our LLC Cost guide to learn more about LLC costs in your state.
Easy to Form
Compared to C corps and S corps, LLCs are very easy to start. You should be able to form an LLC on your own without the help of an attorney.
If you don’t feel comfortable going through the process yourself and would like professional help, we’ve put together a list of the best LLC services.
Starting an LLC yourself is easy. Select your state for detailed steps:
- Alabama LLC
- Alaska LLC
- Arizona LLC
- Arkansas LLC
- California LLC
- Colorado LLC
- Connecticut LLC
- Delaware LLC
- Florida LLC
- Georgia LLC
- Hawaii LLC
- Idaho LLC
- Illinois LLC
- Indiana LLC
- Iowa LLC
- Kansas LLC
- Kentucky LLC
- Louisiana LLC
- Maine LLC
- Maryland LLC
- Massachusetts LLC
- Michigan LLC
- Minnesota LLC
- Mississippi LLC
- Missouri LLC
- Montana LLC
- Nebraska LLC
- Nevada LLC
- New Hampshire LLC
- New Jersey LLC
- New Mexico LLC
- New York LLC
- North Carolina LLC
- North Dakota LLC
- Ohio LLC
- Oklahoma LLC
- Oregon LLC
- Pennsylvania LLC
- Rhode Island LLC
- South Carolina LLC
- South Dakota LLC
- Tennessee LLC
- Texas LLC
- Utah LLC
- Vermont LLC
- Virginia LLC
- Washington LLC
- Washington D.C. LLC
- West Virginia LLC
- Wisconsin LLC
- Wyoming LLC
Corporations are more regulated than LLCs and have considerably more paperwork. LLCs are not required to have a board of directors, keep meeting minutes, or hold shareholder meetings. This means much less time and money spent on keeping records and filing compliance-related documents.
LLCs can decide between member-managed vs. manager-managed structures. Member managed means that the members are actively involved in managing the company’s operations. In a manager-managed LLC, the members delegate the responsibility of managing the company to a manager, who may or may not be a member. In this case, some, or all, members may act more as passive investors. LLCs also aren’t required to have a board of directors which allows management to be more independent.
Forming an LLC is a step up in credibility from a sole proprietorship or partnership. Customers and other businesses will find an LLC more credible, and starting an LLC can show people that you are taking your business seriously.
LLC Benefits FAQs
What are the benefits of an LLC?
Some of the benefits of an LLC include personal liability protection, tax flexibility, their easy startup process, less compliance paperwork, management flexibility, distribution flexibility, few ownership restrictions, charging orders, and the credibility they can give a business.
Learn more here: LLC Benefits guide.
How do LLC owners get paid?
LLC members get paid differently, depending on the LLC’s tax structure. Read our How Do I Pay Myself From My LLC? article for more information.
Is an LLC better for taxes?
LLCs are better for taxes for some businesses but not for all. Read our LLC Tax Guide for more information.
Do LLC pay more taxes than sole proprietorships?
LLCs and sole proprietorships have the same default tax structure. However, LLCs are also eligible to elect S Corp tax status, which could potentially result in them paying fewer taxes than a sole proprietorship, depending on the situation.
Learn more here: LLC vs Sole Proprietorship guide.
Do I need an LLC if I am self-employed?
You don’t need an LLC if self-employed, but we recommend forming an LLC over a sole proprietorship because of the advantages that LLCs offer.
Learn more here: LLC vs Sole Proprietorship guide.
How is an owner's draw taxed in an LLC?
An LLC owner must pay Federal Insurance Contributions Act (FICA) self-employment taxes on their owner’s draw or distribution.
Learn more here: How to Pay Yourself From an LLC guide.
How much does an LLC cost?
The main cost of forming an LLC is the state registration fee, which is between $40 and $500, depending on the state. If you decide to use a professional service to help with the formation process, there will be added expense.
What is pass-through taxation?
Pass-through taxation is a system of taxation that generally applies to sole proprietorships, partnerships, LLCs, and S corps. In this system, the profits or losses of the business are not taxed at the business level. Instead, they pass through to the owners’ personal tax returns and are taxed at each owners’ personal income tax rate.
Read our LLC Tax guide for more information.
Where should I form an LLC?
You should form your LLC in the state where it’s located or conducts business. While certain states may have more business-friendly laws and policies, it becomes more complicated if the business is not actually located there.
Visit our Best State to Form an LLC guide to learn more.
Is it better to form an LLC or a DBA?
Your business’s unique situation and needs will determine whether it’s better to form an LLC or a DBA company. A DBA is a doing business as name and many sole proprietors choose to use a DBA name. In an LLC, you won't need a DBA because LLC formation registers your legal name with the state.
Read our DBA vs. LLC guide for more information.