1. What Is an LLC?
2. LLC: The Pros
3. LLC: The Cons
4. How to Start Your LLC

An LLC small business offers the limited liability of a corporation combined with the management methods of a partnership. As a result, it is sometimes referred to as a "hybrid" business model.

What Is an LLC?

An LLC is a business structure that combines the pass-through taxation of a sole proprietorship or partnership with the limited liability of a corporation. Owners of an LLC are referred to as members. Other individuals and businesses can be members of an LLC. An LLC is allowed to have an unlimited number of members.

The main benefit to an LLC is that its members receive limited liability protection from the debts of the business, as long as the actions taken were: 

  • Lawful
  • Ethical
  • Responsible

LLC: The Pros

  1. Limited liability
    • As long as the business is run responsibly, it will benefit from limited liability. Personal assets such as cars, homes, and bank accounts are protected from creditors.
  2. Pass-through taxation
    • An LLC is known as a pass-through entity. In this format, net profits or losses from the business are passed to the owner level where they are recognized on the personal tax returns of the members.
  3. Flexibility
    • An LLC offers its owners with the option to have its daily operations handled internally by members, or externally by outside employees. It's important to specify with governmental agencies whether your business is member-managed or employee-managed.
  4. Simple startup and low costs
    • The amount of paperwork and fees to start up an LLC is relatively low. In addition,  most owners can easily handle the entire process without reaching out for external, special expertise for assistance.
  5. No residency requirement
    • It is not required that owners be U.S. citizens or permanent residents.
  6. Increased credibility
    • Other businesses, suppliers, partners, and lenders will look more positively on an LLC.

LLC: The Cons

Consider these possibilities before registering as an LLC:

  1. Limited liability is not 100% guaranteed
    • If a judge rules that the actions you've taken were irresponsible, you may be subject to lose the protection of your personal assets.
  2. Self-employment tax
    • For tax purposes, the IRS will automatically consider an LLC similar to a partnership, except when members decide to be taxed as a corporation.
    • If taxed as a partnership, the members will be responsible for paying Medicare and Social Security taxes. The amount of tax paid will be based on the LLC's total net profit.
    • If taxed as an S corporation, the members will pay Medicare and Social Security taxes only on compensation that they're received as an employee of the business. They will be individually taxed on the company's net profits.
  3. Member turnover
    • In numerous states, the LLC will need to be dissolved if a member:
      • Leaves the company
      • Dies
      • Declares Bankruptcy
    •  Any financial or legal obligations that the member in question leaves behind will fall upon the remaining members. 
    • Upon terminating the LLC, the remaining members will be able to establish an entire new LLC.
  4. Limited growth
    • Members are not allowed to issue shares of stock in the LLC in order to attract capital.
  5. Limited uniformity
    • LLCs will be treated differently depending on the state in which they are established.

How to Start Your LLC

  1. Select a name
    • Taking time on the front-end to research a name will pay dividends in the long-run to ensure that the name is well suited for your business and is easily searchable online. 
  2. Select a Registered Agent
    • It is required for all businesses to nominate a registered agent for their LLC.  A registered agent is responsible for sending and receiving legal papers on behalf of the LLC. 
  3. Articles of Organization
  4. Employer Identification Number (EIN)
    • The IRS requests that all businesses that operate as a partnership or corporation or have employees should have an EIN. This nine-digit number identifies your business for tax purposes.
  5. Operating Agreement
    • An Operating Agreement is not required by many states and may be either oral or written. The Operating Agreement should address the: 
      • Management structure
      • Details regarding the ownership allocation
      • Member voting rights
      • Duties and powers of managers and members
      • Process for distributing profits or losses.
  6. Open a business bank account
    • It's important to separate your personal affairs from your business affairs. Open a bank account for your business that is not associated with your personal account. If a lawsuit were filed, being able to clearly identify personal finances versus business funds is advantageous.

If you need help organizing an LLC small business, you can post your job on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.