LLC stands for Limited Liability Company. Forming an LLC is the simplest way of structuring your business to provide personal liability protection.
That means your personal assets are protected if your business is sued.
When a business is structured as an LLC, it becomes its own legal entity. The LLC is responsible for its debts and lawsuits, not the owners.
The owners of an LLC are referred to as members. An LLC can have one owner (single member LLC) or multiple owners (multi-member LLC).
Five Basic Steps to Start an LLC:
- Step 1. Select a State
- Step 2. Name your LLC
- Step 3. Choose a Registered Agent
- Step 4. File the Articles of Organization
- Step 5. Create an Operating Agreement
Simply select your State to get started.
An LLC is just one of several business structures. Other common examples include:
- General Partnership
- Sole Proprietorship
For most small businesses, LLCs offer the right mix of personal asset protection and simplicity. Unlike sole proprietorships and general partnerships, LLCs offer limited liability. Unlike corporations, LLCs are relatively easy to form and maintain, and are not subject to double taxation.
Personal Asset Protection
Provided there is no fraud or criminal behavior, the owners of an LLC are not personally responsible for the llc’s debts or lawsuits.
Pass Through Taxation
An LLC’s profits go directly to its owners, who then report their share of the profits on their individual tax returns. Hence, 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”: profits are taxed before being distributed to owners and taxed again when owners report their share of profits on their individual tax returns.
LLC are relatively easy to form and maintain with little paperwork. Unlike C-Corporations and S-Corporations, LLCs are not required to assign formal officer roles, hold annual meetings, or record company minutes and resolutions.
There are few restrictions on how you can structure the ownership and management of an LLC. Your LLC can be single member or multi member; it can be managed by its members or by managers who are appointed by the members. In addition, an LLC can elect to be taxed as a corporation if that is more beneficial.
**If you plan to start a multi-member LLC, we highly recommend drafting an operating agreement to protect the members from future legal disputes.
Forming your business as an LLC brings added credibility. An LLC is recognized as a more formal business structure than a sole proprietorship or partnership. Including LLC in your business name lets customers and partners know that you are a serious business.
Access Business Loans
Once you have formed an LLC, your business can begin building a credit history. This will help your business access loans and lines of credit.
The main disadvantage of an LLC is that you can’t list your business on the stock market. So, it can be difficult to obtain funding from Venture Capital firms unless you convert your LLC into a Corporation.
Normally when we refer to an LLC we are actually referring to a Domestic LLC. An LLC is referred to as a “domestic LLC” when it is conducting business in the state in which it was formed. Most new businesses form their LLC in the state in which they conduct their business. If your domestic LLC starts conducting business in another state in which your LLC has a physical presence, i.e. an office or employees, then your domestic LLC must also register as a foreign llc in the other state.
When an existing LLC decides to open offices and conduct business in a new state, it needs to register in that state as a foreign LLC. For example, if an LLC "organized" in Texas opens a business establishment in Michigan, then your Texas LLC will need to also form in Michigan as a Foreign LLC. If you're interested in expanding your business, we provide the articles of organization for forming a foreign LLC in all 50 states.
A Professional LLC is a Limited Liability Company that is organized to perform a professional service, for example a Medical or Legal Practice. To form a Professional LLC, it is necessary for certain members of the LLC to possess the necessary state Licenses to demonstrate their professional qualifications. In a Professional LLC, the limitation on personal liability does not extend to Professional Malpractice Claims. Therefore, before forming a Professional LLC it is advised to seek legal counsel.
People starting a business for the first time often ask where they should form their LLC. There is a lot of hype about forming in the following states: Delaware, Nevada and Wyoming. However, in most cases you should form a domestic LLC in the state where your business will be located. To understand why, consider this comparison:
Scenario A: John starts a business in Michigan and registers his LLC in Michigan. He pays a filing fee and an ongoing maintenance fee each year to keep his LLC in good standing.
Scenario B: Mike opens a business in Michigan but chooses to register his LLC in Delaware. Because his business is located in Michigan, his Delaware LLC must also register a foreign LLC in Michigan. Mike is now paying filing fees and maintenance fees in two separate states. He has double the paperwork and pays twice as much as John.
So why the hype about forming a business in Delaware?
Some large investors and bankers prefer working with Delaware businesses due to Delaware’s business friendly laws. However, this rarely offers enough of an advantage to the small business owner to justify the added cost and paperwork of registering in multiple states.
What about Wyoming and Nevada?
Nevada and Wyoming have more relaxed business laws than most other states, hence they are becoming popular. However, unless your business is based in one of these states, your Nevada or Wyoming LLC will still need to register as a foreign LLC in the state where you conduct business. So you will be paying more and filing paperwork in two separate states.
Does it ever make sense to form an LLC outside your home state?
If your business will have a physical presence in multiple states, then you will have to register as a foreign LLC in multiple states. In this case, there may be advantages to forming your business as a domestic LLC in Delaware, Nevada or Wyoming, depending on your specific needs.