If you’ve ever wondered what that “LLC” at the end of some company names stands for, wonder no more! LLC stands for Limited Liability Company. This type of business structure is a popular choice for small businesses and entrepreneurs because it offers personal asset protection for business owners. In other words, if your business is sued or runs into financial trouble, your personal assets (like your home or savings account) are typically protected from lawsuits.
So, if you’re thinking about starting a limited liability company, rest assured that it can offer some valuable protections for you and your business. Let’s learn more about what an LLC is and why you may want to form one for your business.
What is an LLC?
An LLC, or Limited Liability Company, is a business structure that offers personal asset protection for business owners, who are called members of an LLC.
Unlike other business entities, such as a sole proprietorship or general partnership where the small business owner can be personally liable for lawsuits against the business, the Limited Liability Company is a separate business entity that is created through a state agency (each state has a different name for their entity formation department, but most are called the Secretary of State).
By creating a separate entity for the business, the owner’s personal assets and the assets of the business are separated, which provides protection from lawsuits. Besides the liability protection, the Limited Liability Company offers several other benefits over the sole proprietorship, partnership, and corporation because of the multiple tax options, ease of administration, and management flexibility.
Related: What is an LLC?
Advantages and Disadvantages of LLCs
Now that we know that a Limited Liability Company is a legal entity with certain protections, let’s explore the advantages and disadvantages of this business structure.
LLC Advantages:
- Limited Liability: The Limited Liability Company offers protection for the business owner’s personal assets. This means that if the business is sued, the owner’s personal assets are typically protected. There could be exceptions if the owners or employees were purposely negligent.
- Flexibility in Ownership: There are no minimum or maximum limits on the number of members that an LLC can have. Many LLCs have only one LLC member (called a single-member LLC), but there can be more.
- Multiple Tax Options: The LLC offers several tax options, which provide flexibility and possible tax savings for the business owner. For tax purposes, the business can elect to be taxed as a sole proprietorship, partnership, C corporation, or S corporation. Unless the LLC elects to be taxed as a C-corp, the LLC’s profits and losses are passed on to each owner’s personal tax returns. This is what the Internal Revenue Service (IRS) refers to as a “pass-through entity,” like a partnership or sole proprietorship, which avoids the double taxation of corporations (while still getting personal liability protection).
- Raising Capital: In addition to personal and bank loans, the LLC can also raise investment from outside investors by selling a portion of the business. Sole proprietors and partnerships can’t do this.
- Ease of Administration: The Limited Liability Company is easy to administer because there are not as many formalities as there are with the corporations. For example, there is no need to hold board meetings or have a corporate seal.
- Management Flexibility: The LLC offers flexibility in management because the business can be managed by the owner, members, or managers. This is different from a corporation, where the business must be managed by a board of directors.
LLC Disadvantages:
- Limited Liability: While the Limited Liability Company offers protection for the business owner’s personal assets, it may not protect the owner from the debts and liabilities of the business. Some debts, such as those from an unsecured creditor or vendor, may not have to be personally paid back. However, if the business obtains a business loan from the bank, the LLC members will typically have to provide a personal guarantee.
- Cost: The LLC can be more expensive to form than other business structures, such as the sole proprietorship or partnership because there are state filing fees and ongoing maintenance costs.
- Complexity: The Limited Liability Company can be more complex to operate than other business structures because of the multiple tax options and management flexibility.
As you can see, there are both advantages and disadvantages to forming a Limited Liability Company. However, the small cost of liability protection is typically worth it. You will need to weigh the pros and cons to decide if an LLC is the right business structure for your company.
What are LLCs Used For?
Now that we know the basics of what an LLC is and how it works, let’s explore some common uses for this business entity.
The Limited Liability Company is a popular business structure for small businesses because it offers limited liability protection and flexibility in management and taxes. Typically, LLCs are used for a wide range of businesses, such as:
- Consulting
- Online businesses
- Retail businesses
- Service businesses
- Manufacturers
If the business will be seeking a significant amount of investment from outside shareholders, the corporation is usually a better choice due to the types of shares that can be created.
If you are thinking of starting a small business, an LLC may be the right business structure for you. Be sure to consult with an attorney, accountant, or entity formation company to discuss the best way to form and operate your Limited Liability Company.
How Do You Start an LLC?
The process of LLC formation is fairly simple and can be done online in most states. You will need to file the Articles of Organization (sometimes referred to as a Certificate of Organization or Certificate of Formation) with the Secretary of State (or similarly named state agency) and pay the filing fee.
The LLC will need to find a unique business name that isn’t already registered with the state and appointing a registered agent.
Once the Articles of Organization are filed, there are a few additional recommended steps, such as drafting an LLC Operating Agreement, which outlines the rules and regulations for how the LLC will be run, and obtaining an Employer Identification Number (EIN) from the IRS, which is a unique number to identity business – like a social security number does for an individual.
Related: How to start an LLC in each state
How Much Does It Cost to Start an LLC?
LLCs are relatively easy and inexpensive to set up, which makes them a great option for businesses that are just getting started. If you’re thinking about starting your own business, an LLC may be the right choice for you. protected.
The cost to start an LLC varies by state, but the filing will cost between $40 and $500.
Related: Costs to start an LLC by state
Conclusion
Limited liability companies are popular business structures because they offer personal asset protection to business owners. While there are some disadvantages to this business structure, the advantages often outweigh the disadvantages. If you are thinking about starting a limited liability company, be sure to consult with an attorney or tax advisor to discuss the best option for your business.
