Have you ever wished you could get answers to all the common LLC FAQs in one place? Look no further. In this guide, we’ll cover all the essential questions for LLCs, including what they are, their pros and cons, if you need an operating agreement, and more.
Let’s dive in.
An LLC, or a “limited liability company,” is a business entity type created by state statute. From a practical standpoint, an LLC is a bit of a mixture of a corporation and a partnership or sole proprietorship. It has elements of both.
An LLC somewhat resembles a corporation because it gives personal asset protection to its owners. It’s a separate legal entity that can have its own debts, contracts, and liabilities. But an LLC is also similar to a partnership or sole proprietorship because it’s relatively flexible and easy to run. It’s also taxed as a pass-through entity by default.
Every business structure has its pros and cons, and LLCs are no exception. One of the key advantages of an LLC is that it offers limited liability protection; usually, the personal assets of the members can’t be seized to pay for business debts. An LLC also has simple maintenance requirements and a flexible taxation structure.
One of the biggest downsides of an LLC is that it’s harder to raise start-up capital, especially compared to a corporation. LLCs are largely limited to capital contributions the members bring and any loans or grants they can receive. They can’t issue stock. It’s also important to note that even though LLCs are pretty simple to run, they do still have filing requirements. If you don’t like paperwork, that can be a drawback.
Every state has slightly different procedures in place to start a limited liability company. But they all have the same basic steps. First, you’ll choose the state where you want to form your business and create a name that’s available in that state. Then you’ll need to appoint a registered agent.
After that, you’ll file your formation document — often called the Articles of Organization or Certificate of Formation. That form is what officially creates your business in the state, and it always comes with a filing fee. After that, we generally recommend getting an EIN (employer identification number) and completing any unique state requirements like an initial report or affidavit of publication.
Every state’s formation documents look a little different. Some offer online filing, others offer paper forms only, and others offer both. But no matter how you submit your forms, you can expect to list some basic information. Here’s a quick list of the most common items:
Many states require other information as well, but those are pretty common no matter where you file. In most cases, it takes a couple business days to process these forms, but filing speeds vary.
The most important legal aspect of choosing a name is to ensure that your name is unique, or “distinguishable on the record” from all other businesses in the state. Every state has slightly different requirements for what constitutes a unique name, so consult your state statutes. You can check name availability with our handy business name search tool. States also have different rules for words you can’t include in your limited liability company name, what designator you must include (LLC, “Limited Co.,” etc.), and characters you can use.
Beyond that, it’s important to choose an entity name that’s memorable, describes your business, and stands out to customers. You should also like the name you pick.
No matter what state you form your LLC in, you must have a registered agent. Some states call it a statutory agent or something else, but every state requires it. An agent accepts service of process (notifications about lawsuits) and some other official communications on your behalf.
Generally, we recommend appointing someone else to fill this role for you. An agent has to be present at their registered office address during all regular business hours. Plus, it’s one less thing for you to worry about. Our registered agent service fills this role easily.
An operating agreement acts like a constitution or charter for an LLC; it governs how the LLC is run. For example, an operating agreement describes how profits are distributed, the responsibilities of each member, how membership can change, and more. It’s a crucial document, regardless of whether you’re a single-member LLC or multi-member LLC.
Operating agreements are a statutory requirement in five states: Maine, Missouri, California, Delaware, and New York. That said, it’s highly recommended to create one no matter what state you’re in. If you don’t create an operating agreement, your LLC is governed by the default statutes in your state. Drafting your own lets you set the terms for how your LLC operates.
By default, LLCs are taxed like sole proprietors (for single-member LLCs) or partnerships (for multi-member LLCs).That means you’ll pay taxes as an individual on your business income. Typically, this approach repeats on both the state and federal levels. That said, some states also charge a business franchise tax or another tax that applies to LLCs.
You can also elect to be taxed as a C corporation or S corporation (if you meet the IRS criteria). But we recommend consulting with a business attorney or accountant to see if it would benefit your LLC.
A limited liability company offers personal asset protection to its members. If the LLC is sued or defaults on a loan, typically creditors can only seize assets that belong to the LLC. They usually can’t seize personal assets that belong to the members. That’s because the members are shielded by the LLC’s corporate veil.
A corporate veil always protects LLC members — unless a court rules for the veil to be pierced. Corporate veil piercing happens when an LLC is run inappropriately, such as ignoring state statutes, committing fraud, or mingling business and personal funds. If that happens, the members might lose personal assets to settle a judgment.
When running the day-to-day affairs of your LLC, it’s important to maintain any business licenses required by your state, city, or county along with industry-specific licenses. Our business license report can help you determine what licenses and permits are required for your company.
It’s also important to properly maintain your financial books. Our ZenBusiness Money app makes this simple.
A business bank account is also absolutely essential for business purchases. Be sure to keep your personal and business finances completely separate. In most states, you’ll also be required to submit an annual report every year to update your business information.
Usually, yes. In most cases, any entity type can convert into an LLC, provided the right conversion procedure is followed. If you’re operating as an unregistered business like a sole proprietorship or partnership, all you have to do is file paperwork to create an LLC.
If you want to convert a C corporation into an LLC, things are more complicated. And just how complicated it is depends on your state. Some states allow you to complete a statutory merger, filing a few simple forms to change your business type. Other states require you to form a brand-new LLC and then merge with the new entity. If you’re converting your business into an LLC, we recommend consulting with a local business attorney to discuss your options.
No matter why you’re closing your LLC, it’s imperative that you formally dissolve it so your LLC doesn’t incur any ongoing fees. Generally, your LLC has to vote to dissolve, settle its debts and liabilities, and distribute any remaining assets to the members. There’s also paperwork to handle, including filing the Articles of Dissolution (or a similar form), canceling any licenses, and closing bank accounts.
An LLC must abide by the terms set out in its operating agreement when dissolving. It can be helpful to solicit legal advice from an attorney when you’re planning to dissolve an LLC.
There are quite a few common mistakes, so we won’t discuss all of them. But in general, you don’t want to overlook little local requirements such as city business licenses, county property taxes, and so on. There’s also a good chance that you’ll need to register for state sales taxes.
Some states also require “extra” steps when you form your LLC. For example, Alabama requires you to reserve your business name before forming your LLC. New York requires LLCs to submit Affidavits of Publication. California requires an initial statement of information. Be sure to consult with your state’s governing statutes to meet all your local requirements.
A domestic entity is a business entity that operates in the same state where it was formed. For example, if you formed a limited liability company in South Carolina, you’d be a domestic entity in SC. But if you expanded your business into North Carolina, you would register as a foreign business entity in NC by getting a Certificate of Authority there.
In short, “foreign entity” doesn’t mean a business formed in another country; it refers to an entity formed in another state.
Starting an LLC comes with a lot of questions, but ZenBusiness can help. Whether you need someone to fill your registered agent role, submit your formation documents, or supply an operating agreement template, we’ve got your back. We’ll handle the red tape so you can focus on what matters most: your business.
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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