Last Updated: May 22, 2024

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What is an LLC and how does it work?

LLC stands for “limited liability company”. It is defined as a business structure that is allowed by state statute that combining some elements of a sole proprietorship or partnership with aspects of a corporation. This unique classification, like a corporation, enables an LLC to be considered a separate legal entity, and its owners have limited personal liability for the business’s affairs (often called personal asset protection). The process includes registration formalities that vary by state. And like a partnership or sole proprietorship, an LLC offers flexibility and simple maintenance; there aren’t complicated requirements like establishing a board of directors, keeping minutes, or holding shareholder meetings.

As a unique business entity type within the industry, LLCs also have the added benefit of flexible taxation; for federal taxes, an LLC is taxed as a pass-through entity (like a sole proprietorship, partnership, or S corporation) by default, but it can also elect to be taxed as a C corporation. This flexibility lets an LLC’s members (another term for owners) find the taxation structure that works best for their finances, all while staying completely legal. LLCs’ unique product in the corporate world includes potential tax savings and personal liability protection, which are just a few of the numerous benefits of an LLC.

How to Start an LLC in 6 Steps

To start an LLC, you’ll need to choose a name for your business, select a registered agent, file Articles of Organization with the state, create an operating agreement, obtain an Employer Identification Number (EIN) from the IRS, pay any applicable state filing fees, and file a Beneficial Ownership Information report. LLC registration requirements vary state by state, so it’s important that you be well-versed in your specific state laws before proceeding. Generally, it comes down to these six basic steps in our guide below.

  1. Name your LLC
  2. Choose a registered agent
  3. File Articles of Organization for your state
  4. Create an LLC operating agreement
  5. Apply for an EIN and review tax requirements
  6. File a Beneficial Ownership Information report
steps to start an LLC

Follow these steps to start an LLC:

1. Name your LLC

Name your Limited Liability Company (LLC)

Now that you’ve decided you want to form an LLC, it’s time to bring your dream to life with its own name — and yes, it must be unique. When naming your LLC, you must choose something completely different from any other limited liability companies in your state.

The classification rules as to how different your LLC’s name must be from others vary from state to state. Although sometimes all it takes is switching up the punctuation or changing a word from singular to plural to qualify, it’s usually a smoother process when the names are more distinct. However, one component that is always required for the registration is the inclusion of “limited liability company” or an abbreviation of it at the end of the business name. The acceptable abbreviations also vary by state. For specific LLC State Guides select from below.

How to Get a limited liability company with a Unique Name

It’s important to do your research to check if your desired business name is available. Google is helpful, as is checking around on social media, but you will also want to complete a business database search on your Secretary of State website.

Your LLC name needs to be different from other LLCs in your state, and it also can’t be previously trademarked. There are two kinds of trademarks to be aware of: federal and state. Visit the U.S. Patent and Trademark Office (USPTO) site and search your business name or logo to make sure it hasn’t been federally trademarked.

Determining whether your desired business name already has a state trademark is trickier because many states don’t have a search engine for checking existing trademarks. Fortunately, the USPTO has a page linking to the office overseeing trademarks in each state. You can get started by contacting the appropriate office in your state.

Trademarking Names for LLCs

Once you’ve determined that it’s available to use, you have the option of registering your own trademark. A state trademark is less expensive and much less complicated to get; however, it does restrict your trademark benefits to the state it’s recognized in.

On the other hand, federal trademarks are more costly and can take longer to get, but you can use your trademark anywhere in the United States, and there is much more protection provided for your company. Federal trademarks also allow for the ® symbol, whereas state trademarks only allow TM (trademark) or SM (service mark). Trademarking your LLC can keep other businesses from using the same name or anything too similar.

Registering a DBA Name

There’s also an option to add a DBA name (“doing business as”) to LLCs. A DBA is just another name to call your business and can be very useful if your LLC offers multiple products or services. It can help differentiate between their specific business concerns.

Each state has different regulations when it comes to naming an LLC. You will often find that certain words are prohibited, including those that are considered profane or obscene or that may mislead people about the nature of the business. Some words are restricted in most states, such as “bank” and other forms of the word (“banking” and “banker”), “engineering,” “insurance,” and “savings.” In some states, business owners who wish to use words such as these must have a certain license and/or fill out additional paperwork.

You’ve spent time coming up with a name for your LLC and researching its availability — now you can think about securing it. Most states will allow you to reserve your desired name for a fee so that you don’t have to worry about someone else nabbing it before you can officially launch your business. Check with your state on the requirements to reserve your business name. Then, go one step further and reserve a domain name for your company website, so you have that set up and ready to go as soon as your business can launch.

2. Choose a registered agent

choosing a registered agent

Your LLC needs to have a designated party — either a person or a business — who can receive legal notices (such as service of process for a lawsuit) and certain notices from the state. That business or individual is called a registered agent in most states, though they’re sometimes known as a resident agent, statutory agent, or an agent for service of process.

Having a registered agent is a requirement in the United States. Not having one could mean fines or even the dissolution of your LLC by the state. In addition to legal penalties for being out of compliance, failing to maintain an agent could mean that a process server can’t find you to notify you of a lawsuit. In that scenario, a court case against you could go forward without your knowledge, meaning you wouldn’t even have a chance to defend yourself.

You can be your own registered agent so long as you have a physical street address in the state in which your LLC is filed (P.O. boxes aren’t allowed); however, hiring an outside registered agent service has its benefits.

One drawback of being your own registered agent is the increased likelihood of receiving embarrassing legal documents in front of patrons. Not only can this be humiliating, but it might also damage confidence in your business. Using a separate registered agent at another location can help you avoid these risks.

Another drawback to being your own registered agent is that it takes the flexibility out of your day. Registered agents need to be constantly present at the registered office during normal business hours. If you’re tethered to the office, this means you have less time to take business meetings, attend working events, scope out opportunities, etc. A separate registered agent frees you from this responsibility.

3. File the Articles of Organization in your state

filing articles of organization or certificate of formation

The official name for the paperwork filed to register your business depends on which state you’re filing it in. Generally, the document is referred to as the Articles of Organization, but some states refer to it as a Certificate of Formation or Certificate of Organization. Regardless of what it’s called, the concept is the same: It’s used to establish state recognition of the LLC and outline the details of its members.

Filing Requirements for LLCs

Check your Secretary of State’s website to see the filing requirements, as these also vary state by state. You’ll always need basic information about the LLC and its members, including the LLC name and mailing address and the registered agent’s name and address. You might also be asked to state the purpose of the LLC and list any current LLC members and/or managers.

A few parts of the form might be unfamiliar to someone who is just entering the business world. You may be asked whether your LLC is member-managed or manager-managed. In a member-managed LLC, the members take it upon themselves to handle day-to-day operations and decide who’s responsible for what. In a manager-managed LLC, one or more supervisors are chosen by the members to be in charge. As an LLC member, you have the flexibility to shape the management of your company. Whether you opt for a member-managed or manager-managed LLC, each member plays a pivotal role in steering the business towards success.

You’ll also need to list the location of operations, which should be the place in which members work together. If the business is operated from a private home, list your home address. If mail is not deliverable to the place of work, make sure to include a USPS-verified mailing address.

The final, and most important, step is having an organizer of the LLC sign the form. Then, you’re all set to submit it. In most states, this can be done online or by mail. Any instructions for submitting the signed form and payment can be found on your Secretary of State’s website.

4. Create an LLC operating agreement

create operating agreement

Although LLC operating agreements are not required in every state, it’s a smart business move to have one. This legally binding document provides clear and concise definitions of all ownership terms and rules or management decisions. An operating agreement protects owners’ personal assets and outlines ownership percentages, responsibilities, voting power, and a succession plan if an owner decides to leave the business.

Having an operating agreement can prevent any miscommunication and resolve any conflicts between members. It’s not required by law to file an LLC operating agreement with the Secretary of State, so once all parties have agreed upon the terms and signed it, it’s advisable to keep the document safe and secure with other important paperwork.

Create an operating agreement online

Utilizing an operating agreement template for your LLC can set you up for success regarding having the right business structure and format for this important document.

5. Apply for an EIN and review tax requirements

apply for an EIN

After officially forming your LLC, you should consider registering it with the federal government by applying for an Employer Identification Number (EIN) from the IRS.

An EIN is the business equivalent of a personal Social Security number and is required if your LLC has multiple members or any employees. It’s free to apply for a Federal Tax ID Number, a.k.a. Employer Identification Number, and it can conveniently be done on the IRS website. When done online, the EIN is issued immediately.

6. File a Beneficial Ownership Information report

Once your LLC is official, you still have an important new federal obligation to fulfill: filing a Beneficial Ownership Information (BOI) report. Starting in 2024, most LLCs and many other small businesses are required to submit a BOI report to the Financial Crimes Enforcement Network (FinCEN). The BOI report is a requirement under the Corporate Transparency Act, enacted to enhance transparency regarding business ownership to prevent illicit financial activities. Entities subject to this rule include many limited liability companies (LLCs), corporations, and others formed by filing with a Secretary of State or a similar U.S. office. The report is meant to disclose information about a business’s “beneficial owners,” who are individuals with substantial control, ownership interest exceeding 25%, or significant economic benefit from the business’s assets.

You’ll first need to gather information on your LLC’s beneficial owners, including their full names, addresses, and identification documents. Then go to the FinCEN website, where you complete a form online or by PDF. There’s no fee to file. 

Companies formed before January 1, 2024, must file their report by January 1, 2025. Those created after that date have 90 days from their approval by the state to file, and those formed after January 1, 2025, have 30 days from receiving notice of approval. Failure to file can result in substantial penalties, both civil and criminal, making timely submission crucial.

Exempt businesses include those registered under the Commercial Exchange Act, public utilities, governmental authorities, insurance companies, and financial institutions. A foreign company doing business in the U.S. is also considered a reporting company and must file a BOI report. Even if a business closes, it may still be required to file if it hasn’t formally dissolved. Compliance with these rules is crucial to avoid criminal and civil penalties and remain compliant with the Corporate Transparency Act.

You can get more information on the FinCEN website. If you need guidance following this new federal requirement, our Beneficial Ownership Filing service can help.

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More About Limited Liability Companies

What are the Different Types of LLCs?

How They’re Managed

   – Member-managed LLC: All members (owners) have an active role in the day-to-day management of the business. This is common for smaller LLCs where the owners want to be directly involved in the business operations.

   – Manager-managed LLC: Only designated members, or even outside managers, handle the day-to-day operations. This might be suitable for larger LLCs or when some members merely want to be passive investors.

See: Member-managed vs Manager-managed

Number of Members

   – Single-member LLC (SMLLC): This is an LLC with just one member. The IRS treats a single-member LLC as a disregarded entity for tax purposes, which means the LLC itself isn’t taxed; instead, all the income and expenses are reported on the owner’s personal tax return.

   – Multi-member LLC: An LLC with two or more members. By default, the IRS treats multi-member LLCs as partnerships for tax purposes.

Taxation

   – Default Taxation: By default, single-member LLCs are taxed as sole proprietorships and multi-member LLCs are taxed as partnerships. This means the LLC’s income and expenses flow through to the members’ personal tax returns without first being taxed at the business level.

   – LLC Taxed as a Corporation: An LLC can elect to be taxed as a corporation (either a C corporation or an S corporation) by filing a specific form with the IRS. This might be beneficial in certain circumstances, especially if the members want to retain earnings in the company or take advantage of specific tax benefits.

Duration

   – Perpetual LLC: Exists until it is dissolved by the members.

   – Term LLC: Exists for a specified period, as stated in its operating agreement.

Purpose

   – Professional LLC (PLLC): Some states allow licensed professionals like doctors, lawyers, accountants, etc., to form a PLLC. This type of LLC acknowledges the fact that these professionals can’t eliminate personal liability for malpractice with an LLC, but can limit liability for debts or liabilities of the company or other members.

   – Series LLC: Available in some states, this allows for the creation of individual “series” or segments within the LLC that have separate assets and liabilities. Each series operates like a separate entity, shielding the assets of one series from the liabilities of another.

  – Low-Profit Limited Liability Companies (L3C): An L3C is designed for businesses that aim to achieve a specific social or charitable goal while also making a profit. It’s a hybrid between a traditional LLC and a nonprofit, meant to encourage socially beneficial endeavors.

  – Foreign LLCs: This entity type applies when you form an LLC in one state but want to operate in another state. You’ll need to register your LLC as a foreign LLC in the state you want to do business in, complying with that state’s regulations. 

Different states might have variations on these, or additional regulations and requirements for forming and operating an LLC, so it’s always essential to check state-specific laws and consult with a local attorney or business advisor.

Compare LLC to other business structures

Compare how LLCs stand in contrast to other business entities like corporations and partnerships.

Sole Proprietorship

Operating a business as a sole proprietor is relatively low-cost and straightforward, but the major difference between operating as a sole proprietorship versus an LLC is the separation between personal and business. Personal assets are kept separate in an LLC, whereas a sole proprietor’s personal and business expenses are the same. If someone sues the business, they can go after your personal savings and property.

Both LLCs and sole proprietorships benefit from pass-through taxation, avoiding double taxation.

Compare LLCs vs. sole proprietorships.

General Partnership

Here, you are dealing with formalities. Forming an LLC requires several specifics, including paperwork that is drafted and filed with the Secretary of State and paying the filing fee. When forming a general partnership with someone, it requires a much less formal agreement between the two parties. Like sole proprietorships, general partnerships have pass-through taxation.

Visit LLCs vs. Partnerships for a full comparison.

Limited Liability Partnership (LLP)

When it comes to personal liability, LLCs generally offer more broad protection than LLPs. With an LLC, members are usually not personally liable if the LLC is sued or owes any debts.

An LLP may offer limited liability in the same way as an LLC, but this depends on the state in which your business is formed. For example, in some states, an LLP only affords liability protection from other partners’ negligence, but you would still be personally liable for the business’s overall debts and financial obligations.

Some states also require at least one LLP partner to assume unlimited personal liability, while the other partners have limited liability. For this reason, it’s crucial that you check with the Secretary of State office in your state to learn about the specific rules and regulations. 

Compare LLCs vs. LLPs in more detail.

C Corporation

C corporations (the default form of corporation) experience double taxation; profits are taxed at the corporate level and again when distributed as dividends to shareholders. LLCs, with their pass-through taxation, avoid this double hit.

C corporations have a structured management hierarchy with a board of directors and officers, while LLCs allow for more flexible management arrangements.

With a C corporation, you can sell stocks. This not only can help in raising funds, but it also makes ownership transfer easier. LLCs can’t sell stock, and transferring ownership of them can be complex.

Learn more about LLCs vs. C corps.

S Corporation

Rather than a business entity itself, an S corporation is a federal tax election. A C corporation or an LLC can apply to be an S-corp. An S corporation has pass-through taxation, but there are more restrictions for qualifying; for example, an S corp can have no more than 100 members.

Learn more about S corporations vs. LLCs.

Advantages and Disadvantages of an LLC

limited liability protection
flexible tax options
credibility of an LLC

Advantages

We’ve already discussed a couple of the advantages of having an LLC, but let’s outline all the benefits here:  

  1. Protects your personal assets: Members are usually protected from the LLC’s debts and claims (for example, lawsuits or claims for compensation, payments, etc.) should something happen to the company.
  1. Avoids double taxation: The LLC members only pay taxes on the profits they individually receive from the business on their personal tax return without the business itself first being taxed. 
  1. Flexible organization structure: LLCs aren’t required to have the same formal business structure as corporations. Corporations must meet annually to elect a board of directors to oversee company policies, appoint officers to run the business, and contend with more regulations. But LLCs have much more flexibility in how they operate and make decisions for the business, which is outlined in their operating agreement.
  1. No ownership restrictions: LLCs share an advantage with C-corporations in that there are no restrictions on the number and types of owners it can have. S-corporations, though, have restrictions such as not being able to have foreign shareholders or more than 100 shareholders.
  1. No profit restrictions: LLCs also have more options for how large a share each owner takes. Unlike corporate profits, LLC profits don’t have restrictions such as having to be divided according to the percentage of the business that someone owns. 
  1. Less red tape: You’ll encounter less red tape when running an LLC as opposed to a corporation. Although legal requirements for reporting and bookkeeping vary from state to state, LLCs generally have fewer requirements than corporations. 

View a full list of LLC benefits.

Disadvantages

Forming an LLC isn’t entirely without disadvantages, though, such as:

  1. Not internationally recognized: Unlike corporations, LLCs are not recognized outside the U.S. That means doing business in other countries can be more problematic.
  1. Difficult to raise capital: LLCs have a hard time raising capital for the growth of a business because the owners can’t issue shares of stock to attract investors. Many investors are more likely to be attracted to investing in the more familiar form of corporations. It’s also not possible to do an IPO with an LLC.
  1. Having an LLC means registering with your state, which does mean filing fees and paperwork to stay in compliance. At the very least, this means filing Articles of Organization (or your state’s equivalent) with the state and paying the associated fee. This is more than you’d have to pay for or contend with as a sole proprietorship or general partnership, but it’s still less than what’s required for corporations.

How are they taxed?

LLCs have great flexibility regarding how they’re taxed. By default, a single-member LLC is taxed as a sole proprietorship, while a multi-member LLC is taxed as a general partnership. As we mentioned, for most LLCs, this will probably save the most on taxes.

However, by filing an additional form with the IRS, you do also have the option of having your LLC taxed as an S corporation or C corporation. Some LLCs find this beneficial, depending on their circumstances.

C Corporations and LLCs

A C corporation is the most common form of corporation and what most people are referring to when they say “corporation.” It refers to Subchapter C of the Internal Revenue Code.

Although having your LLC taxed as a C corporation will mean double taxation, for certain LLCs, there could be some benefits that would outweigh the disadvantages. For example, C corporations have the widest range of tax deductions, including health insurance premiums.

In the final analysis, some of the C corporation benefits could mean that an LLC would pay less in taxes by being taxed that way. This is where you need a tax professional to run the numbers for you before you make a decision.

S Corporations and LLCs

An S corporation is a tax entity rather than a separate legal business entity type. In fact, an LLC or C corporation can be taxed as an S corporation if they fill out the right form (Form 2553) with the IRS and meet the requirements, which include having:

  • Only U.S. shareholders, which can be individuals, certain trusts, and estates
  • No shareholders that are partnerships, corporations, or non-resident aliens
  • No more than 100 shareholders
  • Only one class of stock

Like most LLCs, S corporations have pass-through taxation. But one of the main reasons an LLC would choose to be taxed as an S corporation is to save money on self-employment taxes.

LLC owners normally pay self-employment taxes (about 15.3%) on all profits. This is more than the taxes they’d pay when working for someone else because their employer would pay part of them.

Instead of paying self-employment taxes on all their profits, owners of an S corporation can pay themselves a salary and only pay self-employment taxes on that salary; the business owners then avoid paying self-employment taxes on the remaining profits. 

This can save the S corp owners a substantial amount of money. However, the IRS expects you to pay yourself at least a “reasonable” salary so that you’ll still pay something in self-employment taxes.

Again, an accountant can help you run the numbers to see if this strategy makes sense for your business.

How much does the LLC application process cost?

Is an LLC free? Creating an LLC isn’t free, as it involves a range of costs that vary by state. Typically, the formation filing fees range between $50 and $500. This process can be accomplished either online using a credit or debit card, or by mail with a check or money order, through your Secretary of State’s website.

Beyond the initial filing fee, states may also mandate additional charges such as business license fees, publication fees, name reservation fees, and others. Moreover, an LLC carries recurring costs for its maintenance, including filing annual or biennial reports, renewing licenses and permits, and paying franchise taxes. These costs will all vary widely by state.

What are the benefits of LLCs?

The benefits of an LLC include limited liability protection for personal assets, flexible tax options, simplified paperwork compared to corporations, and increased credibility.

Limited liability protection: One of the top perks of LLCs is that it usually shields your personal assets, like your house or savings, from business debts and liabilities. If the business runs into trouble or gets sued, your personal assets generally stay safe. It’s like having a protective bubble around your personal finances.

Flexible tax options: With an LLC, you get to choose how you want your business to be taxed. By default, an LLC has “pass-through” taxation, where the business profits flow straight to your personal tax return without first being taxed at the business level (unlike most corporations). Alternatively, you can opt to be taxed as an S corporation or a C corporation, which can provide other tax benefits for certain LLCs. This flexibility lets you adapt to your financial situation.

Simplified paperwork: Compared to corporations, which can have a mountain of paperwork and formalities, LLCs keep things refreshingly simple. You won’t need to deal with things like shareholder meetings or a board of directors. This means fewer administrative headaches and more time to focus on growing your business.

Increased credibility: Having “LLC” after your business name adds a level of professionalism and credibility. Clients, partners, banks, and investors tend to take you more seriously when you’re not just a sole proprietor. It shows that you’ve gone through the process of establishing a legitimate business structure.

Flexible Membership: LLCs offer a blend of flexibility in membership and management, standing as a middle ground between corporations and partnerships. LLCs can have an unlimited number of members, which can be individuals or other business entities, and can choose to be managed by selected members or outside managers. This flexible management structure, along with the freedom to distribute profits in any agreed manner among members, makes LLCs a less formal and more adaptable choice for entrepreneurs compared to the rigid structure and formalities associated with corporations.

So, when you put all these benefits together, forming an LLC can be a savvy move for your business. It provides protection, flexibility, simplicity, and credibility.

Entity Guidelines for States

The rules, procedures, and costs associated with forming an LLC can vary significantly from one state to another. Each state has its own set of statutes and regulations governing formation, operation, and dissolution. For instance, the filing fees for setting up an LLC can range from around $50 to $500 or more, depending on the state. Some states, like California, have additional annual taxes and reporting requirements that can add to the cost and administrative burden of operating an LLC. Moreover, the processing times for formation documents can range from a few business days to several weeks, depending on the state and whether expedited processing options are available and utilized.

In addition to varying costs, the level of information required and the procedures for forming an LLC may differ across states. Some states require a detailed list of member names and addresses, while others only require the name of a registered agent and the address of the LLC’s principal office. Furthermore, certain states may have unique naming conventions or restrictions and may require additional approvals for certain types of businesses. For example, New York requires LLCs to publish a notice of formation in two newspapers, which can significantly add to the cost and complexity of forming an LLC in that state. It’s important for entrepreneurs to carefully research and understand the specific LLC formation requirements and costs in their particular state to ensure compliance and to budget appropriately for the process.

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Limited Liability Company (LLC) FAQs

  • It varies by state, but the standard time frame is two to three weeks from when the state receives your LLC documents, whether online or by mail. In some states, it can be expedited for an additional fee.

  • It’s usually best to form an LLC in the state where your business is located.

  • No. You can form an LLC by yourself. There is no requirement to use a lawyer.

  • If your LLC is filed as a corporation, you won’t need a 1099 for the business. However, if your LLC employs independent contractors, you will need to file 1099 forms for these individuals.

  • The steps may vary state to state, so check your state’s LLC dissolution procedures. Generally, the timeline is the same. You must file the Articles of Dissolution with your Secretary of State, and then file cancellations in any other states that your LLC does business in.

    Next, you must file your final tax return, pay any final payroll taxes, and close your EIN. There’s a lot of paperwork and steps involved in the process.

  • Yes. Since an S corporation is a business entity, it can be the owner (or a member of) an LLC, but an LLC cannot own an S corporation — only individuals can own an S-Corp.

    However, an LLC can be taxed as an S corporation if it meets an S corporation’s eligibility requirements, which include having a limited number of owners who are U.S. citizens.

  • Yes, but it’s not all that common. Certain requirements must be met, and it can be a little confusing to understand all of the legalities. It’s always wise to seek a legal and/or financial professional when considering these questions.

  • Yes, you can form your own limited liability company, provided you follow all of your state’s applicable laws. However, using our business formation service makes LLCs easy and inexpensive to form. We charge $0 to form your LLC, and then our business formation experts do the work for you and are there to answer your questions.

  • Piercing the corporate veil refers to a legal scenario where the courts set aside the limited liability protection normally afforded to members (owners) of an LLC, allowing creditors to go after the personal assets of the members to satisfy the debts of the LLC. This is a rare but serious situation that underscores a fundamental breach in the legal separation between the entity and its owners. It generally happens when the courts believe that the LLC is not truly a separate entity from its owners and that continuing to recognize it as such would result in fraud or an unfair outcome for the LLC’s creditors.

    Several factors can contribute to a court’s decision to pierce the corporate veil of an LLC. Some of these factors include commingling of personal and business funds, failure to maintain separate financial records for the business, undercapitalization, failure to adhere to formalities required for LLCs, or using the LLC to perpetrate fraud or other wrongful conduct. By adhering to all required formalities, keeping personal and business finances strictly separated, and operating the LLC as a truly independent entity, owners can maintain the protective veil of the LLC and safeguard their personal assets from claims against the business.

  • Transferring ownership in an LLC and a corporation involves different procedures and implications due to their distinct structural frameworks. In an LLC, the transfer of ownership can be more complex and restrictive. Typically, the operating agreement of an LLC outlines the procedures and conditions under which ownership can be transferred. It may require the approval of all or a majority of existing members before a transfer can occur.

    Additionally, the sale or transfer of membership interests may not automatically grant the transferee the rights to participate in the management of the LLC, unless the operating agreement provides for this or the existing members consent to it. 

    On the other hand, corporations have a more straightforward process for transferring ownership, especially in the case of publicly traded corporations. The shares of stock that signify ownership in a corporation are freely transferable on the open market, unless restricted by a shareholder agreement. The transfer of shares automatically confers both ownership and management rights to the transferee, making it a more fluid and less restrictive process compared to LLCs.

    This ease of transferability in corporations facilitates the raising of capital and liquidity for shareholders. It’s one of the reasons why corporations are a preferred entity type for businesses that intend to go public or seek investments from a broader base of investors. The structured nature of corporations, with its clear delineation of roles and rights, makes them better suited for larger, more complex business operations with multiple investors and a broader ownership base.

  • A Certificate of Good Standing, also known as a Certificate of Existence or Certificate of Authorization in some states, is an official document issued by the state agency overseeing business registrations, typically the Secretary of State. It certifies that an LLC or another business entity is legally registered and compliant with the state’s requirements and regulations. The certificate validates that the LLC is up to date with its state filing requirements, fee payments, and any other mandated obligations in the state where it was registered.

    An LLC might require a Certificate of Good Standing for various reasons. First, it’s often necessary when the LLC seeks to register or qualify to do business in another state, a process known as foreign qualification. Second, it may be required when an LLC is involved in certain financial transactions, such as securing funding from lenders or entering into contracts with other businesses. The certificate reassures the other parties that the LLC is a well-maintained, legitimate entity, adhering to state compliance requirements.

    Additionally, if the LLC is looking to sell its business or merge with another entity, a Certificate of Good Standing will likely be required to confirm that the LLC is in a compliant status before proceeding with the transaction.

  • A foreign qualification is a legal process that allows an LLC or another business entity to operate and conduct business in a state other than the one where it was originally formed. When an LLC is formed, it’s automatically authorized to do business only in the state of its formation. However, if the LLC wishes to expand its operations to other states, it must obtain approval from each of those states by going through the foreign qualification process. This process typically involves filing specific documents with the Secretary of State or the relevant state agency, paying the necessary filing fees, and appointing a registered agent in the foreign state to receive legal and official communications on behalf of the LLC.

    The necessity for foreign qualification arises when an LLC has a continuous and systematic presence or conducts business in a state other than its home state. This might include having a physical office, employees, bank accounts, or significant sales activities in the foreign state. The foreign qualification ensures that the LLC is compliant with the laws and regulations of the state where it seeks to do business. It also provides a legal platform for the LLC to enforce contracts and access the courts in the foreign state. Without foreign qualification, an LLC may face fines, back taxes, and other penalties, and may be denied the right to bring a lawsuit in the foreign state. Therefore, foreign qualification is a crucial step for LLCs planning to operate across state lines, helping ensure legal compliance and smooth business operations in each state.

Disclaimer: The content on this page is for information 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.

ZenBusiness is a financial technology company and is not a bank. Banking services provided by Thread Bank, Member FDIC. The ZenBusiness Visa Debit Card is issued by Thread Bank pursuant to a license from Visa U.S.A. Inc. and may be used anywhere Visa debit cards are accepted. FDIC insurance is available for funds on deposit through Thread Bank, Member FDIC.

*Your deposits qualify for up to a maximum of $3,000,000 in FDIC insurance coverage when placed at program banks in the Thread Bank deposit sweep program. Your deposits at each program bank become eligible for FDIC insurance up to $250,000, inclusive of any other deposits you may already hold at the bank in the same ownership capacity. You can access the terms and conditions of the sweep program at https://go.thread.bank/sweepdisclosure and a list of program banks at https://go.thread.bank/programbanks. Please contact customerservice@thread.bank with questions regarding the sweep program.

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Written by Team ZenBusiness

“This is your life.
You want to get it right.”

– Mark Cuban on Starting a Business*

Entrepreneur and Shark Tank host lays out
3 steps to follow when starting a business

  • Form an LLC to protect your liability
  • Set up your banking and accounting
  • Grow sales by marketing your website


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* Mr Cuban has a financial interest in ZenBusiness

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