What to Know About LLCs Before You Start One
Learn what to know about LLC formation, management, tax options, and liability protections to make informed business decisions. Start your LLC with confidence. 6 min read updated on April 17, 2025
Key Takeaways
- An LLC offers flexible management, pass-through taxation, and personal liability protection.
- LLCs can be taxed as sole proprietorships, partnerships, or corporations.
- Operating agreements define the structure and internal rules of an LLC.
- LLC formation involves registering with the state, choosing a name, and appointing a registered agent.
- Understanding tax classifications, compliance obligations, and liability shields is essential for LLC owners.
Want to know all about LLC formation? Forming an LLC, whether on your own or with professional assistance, is not terribly difficult to do. It is an ideal way to start an official business that you can grow into a profitable venture.
What Is a Limited Liability Company (LLC)?
A LLC, or limited liability company, is a way to form a business that is legally recognized in all states in the U.S. The point of starting an LLC for your business is to unite the kinship between sole proprietorships and corporations. Both allow the business owner to act as a business while still being able to file a rather simple tax return. An LLC also has similar benefits to a corporation when it comes to protecting the owner’s personal liability.
For tax purposes, you can opt to treat the LLC as a partnership or a corporation based on what is necessary for your business. Once you form an LLC for your business, it will then be its own special entity. It will have its own debt and deal with all legal issues independently of the owner.
Unlike a corporation, an LLC is still connected to your own personal taxes. It is the easiest to form of all legal businesses. LLCs are not as structured as a corporation, so you have some flexibility.
Benefits of an LLC
Limited liability companies offer a range of advantages that appeal to small business owners and entrepreneurs:
- Limited Personal Liability: Owners (members) are generally not personally liable for business debts or lawsuits.
- Pass-Through Taxation: Profits and losses typically pass through to the members’ personal tax returns, avoiding double taxation.
- Flexible Ownership: LLCs can have a single member or multiple members, including individuals, corporations, or even other LLCs.
- Simple Compliance Requirements: Compared to corporations, LLCs face fewer state-imposed recordkeeping and reporting obligations.
- Credibility: Forming an LLC can enhance a business’s credibility with customers, vendors, and financial institutions.
Business Structure and Management for Your LLC
Those who own an LLC are referred to as “members,” much like corporations refer to its owners as “partners.” The two are similar in nature with a few variances:
· A single person or groups of people can own an LLC
· LLCs are less formal in their structure and management
· An LLC is managed with a vested interest for all the members
· The owners of the LLC are in charge of all facets of the business
· Unlike a corporation, there are no separate positions within an LLC. Corporations have directors, shareholders and officers
· A member of an LLC holds the same type of power as the three main roles of a corporation. However, LLC members can distinguish themselves as holding different roles as they see fit
· Ownership within an LLC is largely divided into percentages instead of shares typically seen in corporations
· A different business entity may also be a member of a different LLC
Key Components of an LLC Operating Agreement
Although not required in every state, an operating agreement is vital to a well-functioning LLC. It outlines:
- Ownership Percentages: How the LLC is divided among members.
- Roles and Responsibilities: Whether the LLC is member-managed or manager-managed.
- Voting Rights: Decision-making authority and voting procedures.
- Profit and Loss Distribution: How earnings are shared among members.
- Exit Strategy: Terms for transferring or selling ownership interests.
Having a comprehensive operating agreement helps prevent disputes and ensures operational clarity.
What Is the Difference Between an LLC and a Corporation?
There can be some confusion about LLCs and corporations. They are often mistaken for the same entity. An LLC is not a corporation at all. Corporations and LLCs have totally different make ups when it comes to how they operate.
LLCs are less complex to form than corporations. There are no by-laws to contend with, nor is there a need for a corporate charter. However, an LLC is just as important as a corporation in the eyes of the law. Both must be carefully operated in the eyes of the law to ensure all the financial components are separate from your personal finances.
LLC Taxation: What You Need to Know
One of the most critical aspects of understanding what to know about LLCs is taxation. By default:
- Single-member LLCs are treated as sole proprietorships.
- Multi-member LLCs are taxed as partnerships.
However, LLCs may elect to be taxed as a C corporation or S corporation by filing IRS Form 8832 or Form 2553, respectively. This flexibility allows LLCs to choose the most tax-efficient structure based on their revenue, expenses, and reinvestment strategy.
LLCs must also comply with applicable state and local taxes, including sales tax, franchise tax, and employment taxes if they have employees.
Types of LLCs
There are different types of LLCs that you can form:
· Domestic LLCs: an LLC that is created and operates in your own state. Your state governs your LLC
· Foreign LLCs: an LLC that is not one that is formed internationally. It refers to an LLC that operates in a state different from where it was formed. For instance, you can form a LLC in Louisiana but operate it in Texas
· Member-Managed LLCs: all owners operate the business equally
· Manager-Managed LLC: some members can sit back while others operate the business. Members and non-members may manage the business
· Single-Member LLC: an LLC with one member
· Multiple-Member: LLC with more than one member. It is important to be careful of the operation rights of all members in the event there is a change in ownership
· Series LLC: acts as an overseer of other LLCs and their individual operations. It is currently only an option in eight other states
· Restricted LLC: a type of LLC launched in 2009 that is only available in Nevada. They opt to remain restricted within their operation and do not make any payments to members until 10 years after formation
Steps to Start an LLC
Forming an LLC generally involves the following steps:
- Choose a Business Name: Must be unique and include “LLC” or a variation thereof.
- Appoint a Registered Agent: This person or entity receives legal and tax documents on behalf of the LLC.
- File Articles of Organization: Submit formation documents with the appropriate state agency, usually the Secretary of State.
- Create an Operating Agreement: Establish internal rules and responsibilities.
- Obtain an EIN: Get a federal Employer Identification Number from the IRS for tax purposes.
- Register for State Taxes and Licenses: Based on your business activities and location.
- Open a Business Bank Account: Keeps personal and business finances separate.
Common LLC Compliance Requirements
After formation, LLCs must stay in good standing by fulfilling ongoing requirements such as:
- Annual Reports or Statements of Information: Required in many states.
- State Franchise Taxes or Fees: Ongoing fees may apply depending on the jurisdiction.
- Renewing Business Licenses and Permits: Local permits may need regular renewal.
- Maintaining Accurate Records: Keep detailed minutes, financial documents, and contracts.
Frequently Asked Questions
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What are the disadvantages of an LLC?
LLCs can face self-employment tax, may not attract venture capital as easily as corporations, and can be more expensive to form than sole proprietorships. -
Can I form an LLC by myself?
Yes. A single-member LLC is common and offers the same liability protection as multi-member LLCs. -
How is an LLC different from a sole proprietorship?
An LLC provides personal liability protection and can have multiple members, whereas a sole proprietorship does not separate the business from the owner legally. -
Do I need a lawyer to start an LLC?
No, but consulting an attorney can help ensure compliance with state laws and drafting a strong operating agreement. -
How much does it cost to start an LLC?
The filing fee ranges from $40 to $500 depending on the state, plus ongoing compliance costs.
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