An LLC, short for “limited liability company,” is a business structure allowed by state statute that combines some elements of a sole proprietorship or partnership with aspects of a corporation. Like a corporation, an LLC is a separate legal entity, and its owners have limited personal liability for the business’s affairs (often called personal asset protection). 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, 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. These tax potential tax savings and personal liability protection are just a few of the numerous benefits of an LLC.
When setting up a Limited Liability Company there are different types of business models to consider when starting your own company. How do you know if a Limited Liability Company is the best choice for you? Let’s compare the various options you have, as to how to create a Limited Liability Company for your best purposes.
S Corporation vs. LLC
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 is much like an LLC in that it protects its owners’ personal assets and avoids double taxation. Learn more about S corporations vs LLCs.
Sole Proprietorship vs. LLC
Operating a business as a sole proprietor is relatively low-cost and straightforward, but there is no liability protection like an LLC offers. Compare LLCs vs sole proprietorships.
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.
General Partnership vs. LLC
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 partnership with someone, it requires a much less formal agreement between the two parties.
Visit LLCs vs. Partnerships for a full comparison.
Limited Liability Partnership (LLP) vs. LLC
An LLP operates as an LLC in that it provides limited liability, but an LLP provides it to a different extent. With an LLC, all members are protected from being personally responsible for any business debts or lawsuits. In contrast, an LLP only provides liability protection to each partner for their direct investment. Compare LLCs vs. LLPs in more detail.
LLC vs. C Corp
Like an LLC, a C corporation has liability protection, but it does not protect its owners from double taxation. C corporation owners pay corporate and personal income tax. Learn more about LLCs vs. C corps.
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, and pay any applicable state filing fees. LLC 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 five basic steps in our How to Start an LLC guide below.
Now that you’ve decided you want to form an LLC (definition), 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 rules as to how different your LLC’s name must be from others vary state by 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 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.
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, and it also cannot 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) 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.
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 nationwide, 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.
There is 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 limited liability company 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.
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A registered agent essentially acts as the liaison between a Limited Liability Company and the state it’s registered in. This third-party individual or business entity acts as a point of contact on behalf of the business and receives things like tax forms and legal documents, government correspondences, and notices of a lawsuit.
You can be your own registered agent so long as you have a physical street address in the state in which your Limited Liability Company is filed (P.O. boxes aren’t allowed); however, hiring an outside registered agent service has its benefits.
It allows you to have more privacy and flexibility and can decrease the added stress that can come with being your own agent. Using a third-party registered agent service, such as the one offered at ZenBusiness, ensures that you are compliant with the law, always protected, and strategically organized.
The official name for the paperwork filed to register your business depends on which state you are 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 is used to establish state recognition of the LLC and outline the details of its members.
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.
You will 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 are 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.
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 is 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.
Utilizing an Operating Agreement template can set you up for success regarding having the right business structure and format for this important document. ZenBusiness offers various plan options that include a customizable LLC Operating Agreement template at a very reasonable price.
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 partners or employees. It’s free to apply for a Federal Tax ID Number aka EIN (Employer Identification Number) and can conveniently be done on the IRS website. When done online, the EIN is issued immediately.
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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, 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.
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.
In a nutshell, forming an LLC comes with the perks of liability protection, tax flexibility, and simplicity. However, it’s important to consider potential limitations like limited life, self-employment taxes, and less-established structure. Assessing your business’s needs and goals will help you determine if an LLC is the right choice for you.
There are a few different types of LLCs, each with its own characteristics and purposes. Here’s a breakdown of the main types:
Single-Member LLCs (SMLLC): A single-member LLC is owned and operated by a single individual (member) or entity. It’s the simplest type and offers limited liability protection for the owner (member). Taxes are usually reported on the owner’s personal tax return.
Multi-Member LLCs: A multi-member LLC has two or more owners (members). It’s great for businesses with multiple partners or investors. Each member’s share of profits, losses, and responsibilities is typically outlined in the operating agreement.
Series LLCs: Available only in a few states, a Series LLC can hold multiple “series” or subdivisions within one overarching entity. Each series can have its own assets, liabilities, and operations, providing some separation between them. This is useful for businesses with various ventures or properties.
Professional LLCs (PLLC): Certain licensed professionals like doctors, lawyers, accountants, and architects can form a professional LLC in some states. This structure doesn’t protect a member from malpractice claims against themselves, but it can protect them from malpractice claims against another member of the PLLC. This type of LLC is only available in certain states and for certain licensed professions.
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 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.
Remember that the availability and regulations of these types of LLCs can vary depending on the state you’re in. It’s always a good idea to consult legal and financial experts to determine the best type of LLC for your specific situation and location.
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Is a LLC FREE? Creating an LLC isn’t free, as it involves a range of costs that vary by state. Typically, the formation filing fees oscillate between $40 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.
While setting up an LLC can be performed independently, it’s crucial to consider the substantial time and effort required to navigate complex bureaucratic processes. To mitigate this, services like ZenBusiness can step in. For a nominal fee, they’ll handle your paperwork, provide a registered agent service, and offer an operating agreement template, thereby saving you precious time and potential frustration.
It varies by state, but the standard time frame is two to three weeks from when the state receives your limited liability company documents, whether online or by mail, but can be expedited for an additional fee.
It is 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. Sign up with ZenBusiness today for expert help navigating the process.
If your Limited Liability Company is filed as a corporation, you won’t need a 1099 for the business. However, if your Limited Liability Company 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 is a lot of paperwork and steps involved in the process. ZenBusiness can help ensure that you successfully dissolve your LLC without any hiccups along the way.
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 shareholders who are U.S. citizens. To find out if your LLC is eligible, sign up with ZenBusiness today.
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.
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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