Limited Liability Company LLC: What is it, Advantages and Disadvantages

Most new single-member LLCs classified as disregarded entities will need to obtain an EIN. An LLC applies for an EIN by filing Form SS-4, Application for Employer Identification Number. You can find limited liability company examples of operating agreements online, or a lawyer or online legal service can prepare one for you. There are several company structures that feature limited liability, including a limited liability company (LLC), an S corporation, and a C corporation.

In a general partnership, everyone has complete control and equally unlimited liability. This differs from a limited partnership, where one member assumes complete control of the day-to-day operations and others have limited control and liability. Check your articles of organization carefully before submitting them to your state. You’ll also need to pay a filing fee, which varies depending on the state where you’re forming your business. You must receive and handle crucial legal documents or notices as your LLC’s registered agent. If you are not as knowledgeable about local laws and believe you would struggle to manage this type of paperwork, acting as your own agent may not be best, even if the goal is to save money.

A limited liability company (LLC) is a business structure in the U.S. that protects its owners from personal responsibility for its debts or liabilities. Limited liability companies are hybrid entities that combine the characteristics of a corporation with those of a partnership or sole proprietorship. Depending on elections made by the LLC and the number of members, the IRS will treat an LLC as either a corporation, partnership, or as part of the LLC’s owner’s tax return (a “disregarded entity”). For income tax purposes, an LLC with only one member is treated as an entity disregarded as separate from its owner, unless it files Form 8832 and elects to be treated as a corporation. A limited liability company, commonly referred to as an “LLC”, is a type of business structure commonly used in the United States.

Because only LLC assets are used to pay off business debts, LLC owners stand to lose only the money that they’ve invested in the LLC. If the company chooses to be taxed as a partnership, its income can be allocated across members in forms other than ownership percentage. An LLC with 2 members is classified as a partnership by the IRS. It is important to consider the tax and legal implications of operating as a partnership. If you want your LLC to be taxed as a corporation, you need to file Form 8332. LLCs that file this form receive an S-corp or C-corp designation.

Should I Form An LLC?

If you’re the sole owner of an LLC, it’s a single-member entity. Single-member firms benefit from low startup costs and minimal paperwork compared to other LLCs. However, you are solely responsible for legal compliance, debt payoffs, and tax filing. Many states don’t restrict ownership, meaning anyone can be a member including individuals, corporations, foreigners, foreign entities, and even other LLCs. Some entities, though, cannot form LLCs, including banks and insurance companies.

  • LLCs are subject to fewer regulations than traditional corporations, and thus may allow members to create a more flexible management structure than is possible with other corporate forms.
  • An LLC may choose to be taxed as an S corp or as a default LLC.
  • LLC members are not liable for the company’s debt or legal issues.
  • B-corps stand apart from other corporations regarding mission and purpose; the person or group behind these entities prioritizes running them as ethically and transparently as possible.

An LLC can have one or many “members,” the official term for its owners. Members can be individuals or other businesses, and there is no limit to the number of members an LLC can have. With an LLC structure, members’ personal assets are protected from the business’s creditors. After you’ve designated an agent, you’ll need to acquire a copy of limited liability company formation documents from your Secretary of State and fill them out accordingly.

We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. These reports detail their current business locations, activities in the state, and any changes in their current members and managers. Filing the report and paying the related fee keeps management compliant with state law. Manager-managed LLCs involve members hiring managers to run operations. This allows owners to place leadership decisions in trusted staff’s hands. The details of a manager-managed structure should go in the operating agreement.

Because you’re not personally liable, creditors or people who file lawsuits against your LLC can’t collect against your personal assets like your personal bank accounts, personal car, or home. They are limited to collecting from your LLC’s assets, like your LLC’s bank account. The most common alternatives to an LLC are corporations, partnerships, and sole proprietorships.

Instead, members pay tax on the profits on their own federal income tax returns. Though owners of a limited liability company benefit by avoiding double-taxation, they are required to pay self-employment taxes. These taxes are paid twice as the owner is both the employee and the employer. They can choose to adopt the tax regime of sole proprietorships, partnerships, S corporations, or C corporations.

What Is A Limited Liability Company (LLC)? Definition, Pros & Cons

Generally, it costs $100 to $200 if you do all the work yourself. Most of the cost is the fee to file your articles of organization. Nolo’s online LLC filing service offers packages starting at just $49.00. Unlike with a corporation, it is not necessary to have officers and directors, board or shareholder meetings, or the other administrative burdens that come with having a corporation.

Marketing may be at the top of your mind as you consider names for your business. And while it’s important to choose the right name for branding purposes, your business name must also meet state law requirements. Corporations can have these same advantages, but they have a less flexible operating structure and are usually subject to more reporting requirements than LLCs. You can read more details in our How Much Does It Cost to Form an LLC article. We believe everyone should be able to make financial decisions with confidence. For those who have multiple members managing an LLC, be specific as to the role of each member and how the profits will be distributed among them.

With limited partnerships, only one partner’s assets are protected from business-related debts. It’s easy to create a new LLC by filing paperwork with the state. But to set yourself up for success, you’ll also need to think about your business name, finances, an operating agreement, and licenses and permits.

What is a foreign limited liability company?

There are variations that include sole proprietorship LLCs, family LLCs, and member-managed LLCs. Although the requirements for LLCs vary by state, there are generally some commonalities. The very first thing owners or members must do is to choose a name. An exception would be foreign LLCs that cannot use their original name within a state, as another company has already registered it. That will entirely depend on your small business and its needs. If you are a freelancer or solopreneur, you may do fine with a simple sole proprietorship.

Do I need an LLC for my business?

In other words, if the business fails and accrued debt, the LLC members would not be liable. For certain Employment Tax and Excise Tax requirements discussed below, the EIN of the LLC must be used. An LLC will need an EIN if it has any employees or if it will be required to file any of the excise tax forms listed below.

South Africa, for example, uses a proprietary limited company (Pty Ltd.). C corp isn’t expensive to form and protects shareholders from personal liability. However, they can only have up to 50 shareholders, and Pty Ltd. shares are more difficult to transfer. A professional limited liability company runs like other LLCs but focuses on certain professions. PLLCs form when states with regulatory board licenses on specific professional services or trades prevent these professionals from forming normal LLCs. In these cases, accountants, legal advisers, or medical workers often work under PLLCs instead.

For instance, a single-member LLC owner may operate out of their home but may not want this fact to be a matter of public knowledge. Creating a foreign LLC requires first establishing your business in a different state. Often, you must also provide a certificate of good standing and additional documentation to clear the way for registering your business in other states. You may register your business in as many different states as you want.