LLC Meaning | Limited Liability Company Definition
LLCs are popular because business owners can avoid the double taxation and administrative burden of a corporation while still having the benefit of personal asset protection.
Watch our What is an LLC video or read our LLC guide to learn more.
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Should I Form An LLC?
Forming your business as a limited liability company helps:
- Protect your personal assets in the event of a lawsuit against your business
- Reduce paperwork compared to corporations and other legal entity types
- Prevent your company from double-taxation
- Make your business appear more credible to customers and creditors
A limited liability company is just one of several business structure types. Other common examples include:
- Sole Proprietorships
- General Partnerships
By default, an LLC’s profits go directly to its owners, who then report their share of the profits on their individual tax returns. Therefore, an LLC’s profits are only taxed once. This is known as pass-through taxation.
In a C corporation, profits are subject to "double taxation". This means profits are taxed before being distributed to owners and taxed again when owners report their share of profits on their individual tax returns.
S Corporation Designation
An LLC can file taxes under the "default LLC" classification, or it can elect the S corp designation.
With a default LLC, all company profits pass through to the owners’ personal tax returns, and then the owners must pay income tax and self-employment tax on the entire amount.
With an S corp classification, owners pay income tax and self-employment tax on a predetermined salary. Any profit distributions are only subject to income tax.
Most small businesses file taxes under the default LLC tax classification. You can learn more about when to use the S corporation designation in our LLC vs S corp guide.
How to Form an LLC
When you form your LLC, you will need to complete these steps:
- Name Your LLC
- Choose an LLC Registered Agent
- File Your LLCs Articles of Organization
- Create an LLC Operating Agreement
- Get an EIN
Step 1: Name Your LLC
You will need to provide your state with a unique name when you file your LLCs formation documents.
Step 2: Choose an LLC Registered Agent
Your LLC registered agent will accept legal documents and tax notices on your LLC's behalf. You will list your registered agent when you file your LLC's Articles of Organization.
Step 3: File Your LLC's Articles of Organization
The Articles of Organization, also known as Certificate of Formation or Certificate of Organization, is the document you will file to officially register an LLC with the state.
Step 4: Create an LLC Operating Agreement
An LLC Operating Agreement is a legal document that outlines the ownership and member duties of your LLC.
Step 5: Get an EIN
An EIN is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a social security number for a business. You will need to get an EIN after you form your LLC. EINs are free when you apply directly with IRS. Visit our EIN guide for instructions for getting your free EIN.
How To Start a Business
Once you have learned about the advantages and disadvantages of LLCs and decided if it is the right business structure for you, you will need to actually form and set up the business.
You can read these in more detail in our state-by-state How to Start a Business guides, but here is a quick rundown of some basic steps after forming your business:
- Name Your Business
- File Your Formation Documents
- Register for taxes
- Create business banking and credit accounts
- Set up accounting
- Obtain permits and licenses
- Get insured
- Establish a web presence
What are the benefits of an LLC?
Some advantages of a limited liability company (LLC) include personal asset protection, reduced paperwork when compared to corporations, tax flexibility, and increased credibility with customers and creditors.
How much does it cost to form an LLC?
The primary cost of forming an LLC is the state filing fee. This fee ranges from $40 to $500, depending on your state. You can read more details in our How Much Does It Cost to Form an LLC article.
Where should I form an LLC?
While there may be benefits to forming an LLC in certain states, it’s best to form your LLC in the state where it’s located or conducts business.
Visit our Best State to Form an LLC guide to learn more.
Do I need a lawyer to form an LLC?
You can usually form an LLC without hiring an attorney.
How are LLC members paid?
LLC members are paid differently, depending on the LLC’s tax structure. Read our How Do I Pay Myself From My LLC article for more information.
What’s the difference between an LLC and an S corp?
An S corporation (S corp) is an Internal Revenue Service (IRS) tax classification, not a type of business entity. An LLC may choose to be taxed as an S corp or as a default LLC. Read our What Is the Difference Between an LLC and an S Corp article for more information.
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 sole proprietorship with a DBA. Read our DBA VS. LLC article for more information.
What are the Articles of Organization?
The Articles of Organization is a public document used to form an LLC. In some states, it’s known as the Certificate of Organization or Certificate of Formation.
How many owners can an LLC have?
There’s generally no limit on the number of members (owners) an LLC can have unless it’s taxed as an S corp, in which case the maximum is 100.
What’s the downside to an LLC?
LLCs have a harder time attracting outside investors than do corporations.