What is an LLC?

By Bazal Razzaq

Chief Editor

Updated: June 19, 2023

Editorial Note: We earn a commission if you use the services recommended on this page. Commissions do not affect our opinions or recommendations.

what-is-an-llc

In today’s America, an LLC, or Limited Liability Company, is among the most attractive tools for hopeful entrepreneurs like you! Its tax advantages and flexible management structure provide an edge over other business structures. All thanks to its flexibility and security, it is a popular choice amongst many business owners like you. That being said, what is an LLC?

If you’re an entrepreneur wondering if an LLC is the correct entity for your business, keep reading! ‘Coz, in this blog, we provide the entire scoop on what an LLC is.

What Does LLC Stand For?

To put it formally, an LLC is a legal business entity that provides a legal framework for your business venture. It’s a famous corporate entity structure that shields its owners and members from legal liabilities. As a result, the owner’s assets remain protected from any debts, lawsuits, or obligations the company might face. An LLC also offers tax benefits and flexible management alternatives, which appeal to many business owners. 

Confused? Simply put, An LLC or Limited Liability Company is a special business entity, but only for America. It’s a US-specific business type allowed by state law. This private limited company is a hybrid entity because it features organizations and partnerships. 

So, it’s considered a perfect and secure choice for business owners looking for more safety and protection from debts and other liabilities. An LLC has the best of both worlds, the freedom of a partnership and the asset security of a corporation.

 Unlike your usual business types, an LLC can be set up in any state regardless of the location of your LLC. An LLC formation is usually inexpensive compared to other company setups. Notice that this marks yet another advantage of the limited liability structure. 

Types of LLC

Types-Of-LLC

Limited Liability Company(LLC) can take different forms depending on your state’s legal and business needs. There are five such forms or types an LLC can run within:

  • Single member LLC: A single member LLC is a Limited Liability Company with one voting member, i.e., the owner. This member has complete control over their business and functions just as an LLC would. With a Single member firm, you’ll benefit from low startup costs and very little paperwork. However, you’ll be solely responsible for paying off debts, tax filings, and legal compliance.
  • Multi member LLC: As the name suggests, a Multi member LLC is a Limited Liability Company with more than one voting member/owner. Each member has limited liability protection and an operating agreement that sets the operations and management of the LLC. The same operating agreement outlines the roles and rights of each member involved. 
  • Member managed LLC: In a member managed LLC, all owners/members have the right to participate in their LLC’s management and decision-making. They can act on the company’s behalf if they adhere to the operating agreement. This structure is best suited for small businesses where all LLCs actively wish to be involved with the day-to-day activities of their business.
  • Manager managed LLC: In a manager managed LLC, the owners/members elect one or more managers to handle the LLC’s operations and decision-making. These managers may be within the company itself or hired externally. This structure comes in handy when the members prefer to assign management roles and responsibilities to selected individuals while maintaining ownership rights.
  • PLLCs: A PLLC or professional LLC runs like a regular LLC but focuses only on certain professions. Licensed professionals like doctors, lawyers, accountants, and architects are sometimes assigned by law to form a professional LLC than a traditional LLC. A PLLC also provides limited liability protection to its professionals while letting them practice their respective professions.

Formation Process of Starting an LLC

LLCs are easier to set up than other company structures. They have a low running overhead cost and a simple tax structure.

The process of forming an LLC is fairly easy. Even though certain requirements depend greatly on which state you’re in, most LLC formation steps are as follows:

Pick an LLC business name:

Before your LLC is registered, you must pick a catchy and engaging name. While choosing a name, always consider that,

  • It can’t be the same as another registered business name.
  • There are no restrictive terms such as “insurance,” “board,” or any obscene or forbidden words.
  • It should not be used as a domain name to avoid trademark or legal issues. 
  • The name should reflect its LLC status. It should end with abbreviations like “LLC,” “LLC,” or “Ltd.”

Choose a Registered Agent:

Your LLC needs a registered agent to receive all important legal documentation, such as annual renewal forms or service of process notices, on behalf of you and your business. In some states, you must have a person or entity authorized to receive government ordinances, tax forms, and lawsuit notices. 

Apply for an LLC EIN:

An EIN, or Employer Identification Number, offers formal identification for taxation and is termed tax ID. Anyone from the country can apply for an EIN on the IRS website, but if you’re based out of your LLC state, you can email or fax the required Form SS-4.

File Articles of Organization:

Articles of Organization, or Incorporation, identify your LLC name, address, and other information. It’s a legal document establishing your LLC with the Secretary of State. The form contains the following:

  • Your LLC name and address.
  • The main purpose of your LLC.
  • The number of shares authorized.
  • The names and addresses of its members.
  • Registered agent’s name and address.
  • The management structure of your LLC.
  • Signature of the person forming the LLC.

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Set an operating agreement:

An operating agreement is an internal document that contains information on the LLC’s operating terms and describes its members’ roles, rights, and responsibilities. 

While this may not be a requirement for all US states, you should consider creating one in case the co-owners ever get into a disagreement and need help arriving at a solution.

Open a US Business Bank Account:

As an LLC owner, you can set up a business bank account in the United States, but only after you’ve met the following conditions:

  1. You have an Employer Identification Number(EIN), and,
  2. A business address(use your registered agent service address)
  3. Can open the account in person.

Cost of forming an LLC

An LLC formation is usually inexpensive compared to other business setups. Notice that this marks yet another advantage of the limited liability structure. 

However, starting and running an LLC can cost a pretty penny now and then. How many pennies? Well, that completely depends on where and how you set it up and whether you decide to do it independently or hire someone professional to make things easier. 

Visit our blog for detailed state-by-state filing fees and state-by-state filing fees. 

Benefits of an LLC

LLC is a famous corporate entity structure that shields its owners from legal liabilities. As a result, the owner’s assets remain protected from any legal or financial troubles the company might face. 

An LLC also offers several tax benefits and flexible management alternatives, which appeal to business owners. Several other benefits that come into play are:

Limited Liability Protection:

In litigation or other legal proceedings, it can protect your assets from being collected or seized for debts, seizures, or other liabilities. 

To put it simply, when an entrepreneur has limited liability protection, they won’t be held responsible if their business suffers a loss.

Tax advantages

As mentioned earlier, LLC benefits from the best of both worlds regarding taxation. They can adopt the tax status of sole proprietorships, partnerships, S corporations, or C corporations but face no federal taxation. 

Depending on how many owners/members an LLC has, the IRS will automatically consider it as a partnership or a sole proprietorship. As a result, LLCs can always benefit from “pass-through” taxation, in which the LLC pays neither LLC taxes nor corporate taxes. So, double yay!

Instead, the LLC’s earnings and costs reflect on the owners’ personal tax returns, and any profits are subject to personal income tax.

Pass-through taxation:

Pass-through taxation means that all the profits and deductions of the LLC are passed through to the members/owners of the LLC and are reported on their tax returns, which leads to lower taxes for the company, its owners, and its members.

Permanent Existence

Until the operating agreement mentions otherwise, a limited liability company can exist forever, meaning ownership can change without leading to a company’s collapse. The company doesn’t need to shut down if a member dies, retires, or leaves for any other reason.

According to the major state, an LLC can close down

  1. If any of the situations mentioned in the operating agreement happens,
  2. Members say yes to the dissolution
  3. The LLC is closed through a judicial or administrative process.

Distinct Legal Identity

An LLC (Limited Liability Company) is a legal business entity with rights, obligations, and liabilities distinct from its owners. This indicates that an LLC can file a lawsuit or be sued independently at any given point. 

Drawbacks of an LLC

Despite their attractive benefits, they do have a few cons. While the drawbacks aren’t as many, as a business owner, you can consider the following:

  1. State-by-state limitations: Some states in America charge extra for an LLC formation. Additionally, many states restrict professions like lawyers, doctors, and accountants from working within an LLC.
  2. Expensive: An LLC costs more than other business entities like sole proprietorship or partnership. Added features like annual reports further increase the expenses.
  3. More taxes on split income: All income earned or profits from an LLC could be subject to payroll taxes or self-employment. 
  4. Transfer restrictions: Unlike corporations, all LLC members/owners should approve new members and membership transfers, placing limitations.

Best States to form an LLC

Best-States-To-Form-An-LLC

The first myth to clear is that you can only file an LLC at the same place you live. That’s completely untrue. One can form an LLC anywhere in the United States. 

Different states offer different privileges, benefits, and also drawbacks. So you need to be as smart and well-informed as possible.

While the choice depends on your business models, personal preferences, and company needs, some states are favored more than others:

Your Home State

Yes. You read that right. Your home state is indeed the best state to set up an LLC! Why? Because forming an LLC in your state is affordable, usually simpler, and away from all the hustling and bustling that comes with starting an LLC in any other state. 

Another major reason is it may be cheaper to file an LLC locally instead of filing one in another state and then registering it as a Foreign LLC in your home state.

Delaware

If you’re planning to start an LLC, chances are you already have an idea about Delaware being the most business-friendly state for not just LLCs but all and any type of business corporation. Suppose we believe the Delaware Division of Corporations Annual Report, 66.8% Percent of all Fortune 500 Companies are incorporated in Delaware. In that case, the state sets itself apart with its General Corporation Law and Court of Chancery.

Nevada

Nevada attracts much attention from aspiring entrepreneurs like you who want to avoid paying high taxes. That’s because it doesn’t impose any income taxes, personal and corporate, and levies no franchise taxes. 

Enough pros are supporting a Nevada LLC,

  1. No personal or corporate taxes
  2. Free of franchise taxes
  3. Owners of LLCs can stay anonymous.
  4. No agreement for information exchange with the IRS
  5. There is no need for yearly meetings or operating agreements.

Wyoming

Wyoming is another state that offers low fees and amazing tax benefits for business owners. It is yet another business-friendly state for starting an LLC. Like Nevada, it offers a market-friendly tax structure and doesn’t impose personal, corporate, or franchise taxes. It ranks #1 in the Tax Foundation’s 2023 State Business Tax Climate Index.

Some states may sound better, but it all rests on you. An honest, reliable, groundbreaking LLC will work in any state of America!

Who should form an LLC?

Any individual working on starting a business or running a sole proprietorship should consider forming an LLC, especially if you’re worried about limiting your legal liability as much as possible. 

Registering and running as an LLC protects your private assets, credibility, and other benefits. Overall, an LLC is an ideal choice for small to medium business owners.

Frequently Asked Questions​

Your home state, Delaware, Nevada, and Wyoming, are often highlighted as the best states to form an LLC in. However, before making any solid decisions seek consultation with a professional. 

The cost to start an LLC varies depending on the state and any additional services. On average, the filing fees range from $50 to $500. You should check the specific needs and fees of the state where you plan to form your LLC.

 To set up an LLC as a non-resident, follow these steps:

  1. Choose a state with good LLC laws.
  2. Select a registered agent 
  3. File the Articles of Organization and pay the required fees.
  4. Obtain an Employer Identification Number (EIN) from the IRS.
  5. Create an operating agreement outlining the LLC’s structure and rules.
  6. Maintain proper records
  7. Seek professional advice for specific legal and tax considerations.

An LLC, which stands for Limited Liability Company, is a type of business structure that combines the benefits of a corporation and a partnership. It’s like a shield that protects the owners, who are called “members,” from being personally responsible for the company’s debts or legal troubles.

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