What is an LLC?
LLC stands for limited liability company. Forming an LLC is the simplest way of structuring your business to protect your personal assets in the event your business is sued.
An LLC is the most popular business structure chosen by small business owners that offers:
- Personal liability protection of a corporation
- Pass-through taxation benefits of a sole proprietorship or partnership.
Ready to get started? You can form yourself using our Form an LLC guide, or use a trusted service from our Best LLC Services list.
In this What is an LLC article we cover:
Understanding What is an LLC
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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.
For most small business owners, a limited liability company offers the right mix of personal asset protection and simplicity. 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 a multi-member LLC.
Forming your business as a limited liability company (LLC) helps:
- Protect you against lawsuits.
- Reduce paperwork compared to corporations and other legal entity types.
- Prevent your company from being taxed twice.
- Make your business appear more credible to customers and creditors.
A limited liability company (LLC) is just one of several business structures. Other common examples include:
- General Partnerships
- Sole Proprietorships
Recommended Service: If you're ready to start your LLC, check out our recommended LLC service provider: Northwest ($29 + state fees)
Advantages Of An LLC
LLCs offer these benefits to small businesses:
- Limited liability protection
- Pass-through taxation
- Tax options
- Increased credibility
- Access to business loans and credit
Limited Liability 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. This is often referred to as personal asset protection.
Note: LLCs help protect your personal assets. Liability insurance can help protect your business assets from lawsuits. Learn more about liability insurance in TRUiC's General Liability Insurance guide.
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.
Limited liability companies are relatively easy to form and maintain with little paperwork. Unlike C 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
- A Multi-Member LLC can be managed by its members, termed as member-managed.
- A Multi-Member LLC can be managed by a manager that is appointed by its members, termed as manager-managed.
A limited liability company can choose among three different ways of paying income tax. One popular option is to be taxed as an S corporation. Technically an S corp is a tax designation, not its own type of business entity.
You can learn more about choosing the S corporation tax designation in our LLC vs S corp guide.
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 To 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.
If you have a women-owned business, discover the right financing opportunity by reading our list of the top loans for women entrepreneurs.
Disadvantages Of An LLC
LLCs offer many benefits but there are small disadvantages:
- Because LLCs are pass-through entities like a sole proprietorship, LLC owners are responsible for paying taxes on their share of LLC income, whether or not they are given a disbursement. This is why LLCs don't attract investors like a corporation.
- 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: For more information about the advantages and disadvantages of LLCs specifically relating to taxes, check out our LLC Taxes guide.
Who Can Form an LLC
Any person of legal age can form an LLC in the US. LLC owners do not have to be US citizens; they can be from any country except for those under US sanctions.
To learn how to form a company from abroad, read our How to Company in the USA
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.
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.
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.
A Professional LLC is a limited liability company that is organized to perform a professional service, like 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.
A Series LLC is a unique type of LLC where a single “parent” LLC provides limited liability protection across a series of “child” businesses (individual protected series). 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.
How To Form A Limited Liability Company
Forming an LLC is easy. Our state-by-state LLC formation guides streamline the process into six easy steps. Just choose your state from the dropdown below.
As mentioned above, you can form yourself using the guide below, or use our recommended LLC formation service: ZenBusiness ($49 + state fees).
Six Basic Steps to Start an LLC
Step 1: Select Your 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
Step 6: Get an EIN
Step 1: Select Your State
For detailed step-by-step instructions for forming an LLC in your state, choose your state from below:
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- South Dakota
- Washington D.C.
- West Virginia
Step 2: Name Your LLC
You will need to give your business a unique name that is distinguishable from all registered names in your state when you file your LLC's formation documents.
Our Business Name Generator and our How to Name a Business guide are free tools available to entrepreneurs that need help naming their business.
Step 3: 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 4: File Your LLC's Articles of Organization
The Articles of Organization, also known as a Certificate of Formation or a Certificate of Organization in some states, is the document you will file to officially register an LLC with the state.
Step 5: Create an LLC Operating Agreement
An LLC operating agreement is a legal document that outlines the ownership and member duties of your LLC.
Our operating agreement tool is a free resource for business owners.
Step 6: Get an EIN or Transfer an Existing EIN
An Employer Identification Number (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.
EINs are free when you apply directly with the IRS. For more information about whether your LLC is required to obtain an EIN, visit our EIN for LLCs guide.
Who Will Manage Your 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.
You can learn more about LLC management in our member-managed vs manager-managed LLC 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.
Read our Best State to Form an LLC guide to learn more.
What states are most popular with small businesses?
Most small business LLCs are formed in Texas and Florida. Small businesses in these states seem most satisfied with the taxation and fees in these states. Again forming an LLC in Texas and Florida only makes sense if your business is located in these states.
Is an LLC right for your business? If so, then get started today by forming an LLC with our recommended LLC formation service: Northwest ($29 + state fees)
LLC Frequently Asked Questions
What is an LLC?
LLC stands for limited liability company. Forming an LLC is the simplest way of structuring your business to protect your personal assets in the event your business is sued. An LLC is the most popular business structure chosen by small business owners.
How much does it cost to form an LLC?
The cost 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 form an LLC guides to set up your LLC.
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 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.
For a free LLC Operating Agreement template and more information - Check out our LLC Operating Agreement article.
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:
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.
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 are the benefits of an LLC?
LLCs offer the liability protection of a corporation with the simplicity and pass-through taxation of a sole proprietorship. LLCs are affordable and easy to maintain.
Learn more in our LLC Benefits guide.
What is an LLC license?
There is no such thing as 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.
How do I pay myself from my LLC?
How LLC owners pay themselves depends on how the LLC is taxed, the number of members, and any agreements regarding profit sharing and sweat equity.
In a single-member LLC (SMLLC) or multi-member LLC (MMLLC), you can pay yourself:
- a distribution that passes through to your individual tax return, or
- a reasonable salary and distribution as an S corporation (S corp)
Read our guide to learn more about how to pay yourself from an LLC.
How do I change from a sole proprietor to an LLC?
It is easy to convert your sole proprietorship into an LLC. Our Sole Proprietorship to LLC guide discusses the exact steps to take to make the transfer.
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