What is a Limited Liability Company?

LLC benefits diagram less regulation, ownership, personal asset protection, separate entity, management, passthrough taxation

LLC stands for Limited Liability Company. Forming an LLC is the simplest way of structuring your business to protect your personal assets in case your business is sued.

LLCs can be owned by one or more people, who are known as LLC "members". An LLC with one owner is known as a single-member LLC, and an LLC with more than one owner is known as a multi-member LLC.

Form an LLC today by using our free guide or one of these trusted services.

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Should I Form an LLC?

Forming your business as a limited liability company helps:

  • Protect you against lawsuits.
  • Reduce paperwork compared to corporations and other legal entity types.
  • Prevents your company from being taxed twice.
  • Make your business appear more credible to customers and creditors.

A limited liability company is just one of several business structures. Other common examples include:

  • Corporations
  • General Partnerships
  • Sole Proprietorships
A comparison chart showing the benefits of an LLC compared to corporations, general partnerships, and sole proprietorships

TIP

Unlike other business structures, LLCs can choose among three different ways of paying income tax. One popular option is to be taxed as an S-Corporation, also known as an S-Corp. Technically an S-Corp is just a tax designation, not its own type of business entity. Learn more.

For most small businesses, a limited liability company offers the right mix of personal asset protection and simplicity. Unlike sole proprietorships and general partnerships, LLCs can protect your personal assets if your business is sued. Unlike corporations, LLCs are relatively easy to form and maintain, and are not subject to double taxation.

LLCs also offer the easiest way of choosing the S-Corp tax designation, because they are simpler to maintain than a standard C-Corporation.

Advantages of an LLC

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". 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.

Simplicity

Limited liability companies 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.

Flexibility

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
  • A Multi-Member LLC can be managed by its members, termed as member-managed.
  • or A Multi-Member LLC can be managed by a manager that is appointed by its members, termed as manager-managed.

In addition, an LLC can elect to be taxed as a C-Corp or S-Corp if that is more beneficial.

Use our free Operating Agreement Tool to outline ownership procedures for your LLC.

Increased Credibility

Forming your business as a limited liability company 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 credible 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.

Disadvantages of an LLC

Although pass-through taxation has many benefits, there are certain disadvantages.

1. Because LLCs are pass-through entities, LLC owners are responsible for paying taxes on their share of LLC income, whether or not they are given a disbursement.

2. All members must wait until the LLC sends out K-1 forms to complete their personal taxes. For this reason, most investors will not fund LLCs.

*Recommended: Learn more about LLC taxes by reading TRUiC's LLC Tax Guide.

Where should I form my LLC?

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 limited liability company 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. 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.

How to Form an LLC

Forming an LLC is easy. Our State-by-State LLC Formation Guides break the process down into five easy steps. You can either follow our DIY guide, or hire a service provider like ZenBusiness or LegalZoom to form your LLC for you.

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

Who will Manage the LLC?

Generally, an LLC is managed by its members, known as member-managed. However, in some cases, members will appoint a manager to handle the LLC’s daily operations, and this is called manager-managed.

The membership of an LLC and the way it will be run are laid out in a legal document known as an operating agreement. This is an internal agreement among all the members of the LLC.

Types of LLCs

All LLCs offer the same features that make them a unique hybrid of other business entities: limited liability and pass-through taxation. Some LLC types work best for a particular business scenario. Here are the most common types of LLCs.

Domestic LLC

An LLC is referred to as a "domestic LLC" when it is conducting business in the state in which it was formed. Normally when we refer to an LLC we are actually referring to a Domestic LLC.

Foreign LLC

When an existing LLC decides to open offices or have any other kind of physical presence 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.

Professional LLC

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.

Series LLC

A Series LLC is a unique type of LLC where a single “parent” LLC provides limited liability protection across a series of “child” businesses. Also, each “child” business is protected from the liabilities of the other businesses under the single Series LLC.

Currently you can only form a Series LLC in seventeen states:

Alabama, Delaware, Washington D.C., Illinois, Indiana, Iowa, Kansas, Minnesota, Missouri, Montana, Nevada, North Dakota, Oklahoma, Tennessee, Texas, Utah, and Wisconsin.

LLC Frequently Asked Questions

How Much Does it Cost to Form an LLC?

The costs of forming an LLC will vary from State to State. In general, you can expect to pay a minimum of between $50 and $500 to form your LLC, and around $100 annually to maintain your LLC. These costs will increase if you hire a lawyer or use a professional service provider to form or maintain your LLC. Visit our free state guides to set up your LLC.

Recommended: For a complete breakdown of the costs associated with forming and maintaining an LLC - Read our article, LLC Costs By State.

What is a Registered Agent?

A registered agent is a person or business nominated to receive and send legal documents on your LLCs behalf. In most states, you are required to nominate a registered agent when forming your LLC. In some states a registered agent is known as a resident agent or agent for service of process. To learn more, read our what is a registered agent article.

What is an Operating Agreement?

An LLC Operating Agreement is a legal document that outlines ownership and operating procedures of your Limited Liability Company. This agreement allows you to create the financial and working relations among business owners (members) and between members and managers. Having this document in place is important in the event that a dispute or lawsuit arises.

Recommended: For a free Operating Agreement template and more information - Check out our article, What is an Operating Agreement?

What are the Articles of Organization?

The Articles of Organization is the legal document you submit to your state to form your LLC. This document contains important information related to your LLC, such as your LLC's name, purpose, and the name and address of your registered agent. The articles of organization are also known as a certificate of formation or certificate of organization.

How are LLCs Taxed?

LLCs have the advantage of pass-through taxation. This means the LLC’s profits pass through to its members, who pay taxes on their share of the earnings on their individual tax returns. Multi-member LLCs file an annual earnings report to the IRS using form 1065. For more information on state level LLC taxation, read our state tax guide.

Although LLCs are pass-through entities, there are several types of state-level tax that may still apply to your LLC:

Franchise Tax

Many states levy a "franchise tax" on LLCs, which is either a flat-rate annual fee, or a percentage of your LLCs annual earnings.

Unemployment Tax and Income Withholding Tax

If your LLC has employees, you will need to register for Unemployment Insurance Tax and Income Withholding Tax.

Sales Tax

If your LLC sells taxable goods or services, you will need to register for a seller's permit and collect sales tax on behalf of your state. For more information, read our guide to sales tax for small businesses.

What is an LLC License?

There is no such thing an "LLC license" per se. To form your business as an LLC, simply follow the steps above in the How to Form an LLC section. Many types of companies do require a state business license in order to conduct business. To learn more about business licenses and permits, read our guide.

How Long does it take to Form an LLC?

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

Do I need a Lawyer to Form an LLC?

You don’t need a lawyer to form an LLC. Our free LLC formation guides cover all the steps to set up an LLC in all 50 states. To save time, you can hire a professional service provider that can set up your LLC for you. If you are thinking about starting a Professional LLC, such as a legal or medical practice, it is recommended that you consult a lawyer.

Does an LLC have a Board of Directors?

Unlike corporations, LLCs are not required to have a board of directors. An LLC is typically managed by its members, unless the Articles of Organization appoint a non-member manager to manage the LLC.

Does an LLC have Shareholders?

LLCs don’t have shareholders and they can’t sell shares on the stock market. Instead, an LLC is owned by its members, who split the business earnings among each other. The way your LLC’s earnings will be divided should be explicitly stated in your Operating Agreement.

Can I Form an LLC in Another State?

Yes, you can form an LLC in another state. If you already have a domestic LLC and wish to expand your business to another state, you will need to form a foreign LLC in that state. Generally it is not recommended to form an LLC in a state where you do not plan to conduct business.