LLC
A limited liability company (LLC) is a type of business structure that protects its owners from personal liability for the business’ financial obligations.
What is an LLC?
An LLC is a legal entity formed by an individual or group of business partners through the filing of the articles of organization. This document, also known as a certificate of organization or certificate of formation in some states, outlines important information relating to the business, including the name, address, registered agent, and management structure.
By filing this document with the relevant state authorities, the LLC members can differentiate their personal income and personal assets from any business assets or obligations. This can save the members from major damage to their personal finances if the business falls on hard times or is subject to a lawsuit.
Forming an LLC can also make things much easier for federal income tax purposes and provide a lot of flexibility for your business’ processes and operating procedures. For a more complete understanding of what these processes and how they can protect your finances, check out our full guide to LLCs.
Benefits of an LLC
An LLC carries many benefits for business owners compared to other types of business entities. These benefits include:
- Liability protection. LLC members are usually not held personally liable for the company’s debts, whereas sole proprietorships and general partnerships provide no liability protection.
- Tax simplicity. Unlike the owners of a corporation, US tax law allows LLC members to pay federal taxes directly on their profits from the business using a practice known as pass-through taxation through a disregarded entity. This can simplify the process and allow members to avoid paying self-employment taxes to the Internal Revenue Service.
- Flexibility. An LLC can offer a lot of flexibility, allowing owners to determine their preferred way of managing profit-sharing, capital contributions, organizational structure, and many other details of the business.
FAQs
How much does an LLC cost?
The cost to register an LLC varies from state to state and business to business. All 50 states have a one-time fee associated with registering your LLC, and many states require a yearly or biennial fee when the business submits its periodic report.
All told, the cost can range anywhere from $50 to several hundred dollars.
Who needs an LLC?
Most businesses should at least consider registering as an LLC. Because the structure is so flexible, many different types of organizations would benefit from the liability protection afforded by an LLC. If you expect your business to have financial obligations greater than you’re prepared to cover out of your own personal finances, you might want an LLC. If you want additional advice that is specific to your unique needs, you should talk to an attorney.
What is the difference between an LLC and a corporation?
While an LLC’s assets are owned by its members, a corporation’s owners hold shares of the company. The managers of a corporation are also typically more removed from the day-to-day operations of the business than LLC members.
The two types of businesses are also taxed differently, with corporations being taxed as separate entities and paying a corporate income tax on top of taxes paid on shareholders’ dividends.