What Is a Limited Liability Company?

New business owners may choose to set up a limited liability company (LLC), a common business structure that combines features of a partnership with those of a corporation. An LLC is formed under state law and protects the business owner from personal liability for business debts. An LLC offers the operating flexibility and pass-through taxation benefits of a partnership or sole proprietorship. This allows owners to avoid the double taxation of C corporations. Pass-through taxation means that profits and losses are reported on the owner's personal tax statement and are not taxed at both the individual and corporate levels.

The establishment guidelines for an LLC may vary slightly by state. However, they typically require submission of articles of incorporation and a filing fee. Although you don't need an attorney, you may want to hire one if your LLC has outside investors or more than one owner. Unlike corporations, LLCs are not subject to formal meeting requirements.

How Are LLCs Taxed?

An LLC can choose to be taxed as either a:

  • Sole proprietorship
  • Partnership
  • Corporation. 

If no election is made, a single-member LLC will be treated as a sole proprietorship by the IRS and a multimember LLC is considered a partnership by default. An accountant can help you with this decision, which must be made within 75 days of the LLC formation.

Choose the State Where You Want to Organize

Your LLC will be subject to the relevant laws of the state where it is established. Many businesses choose Delaware because of its extensive body of law governing LLCs. In most cases, you should form in the state where your business actually operates to avoid additional costs and legal requirements. An LLC that does business in more than one state typically must register with each Secretary of State office.

Name Your LLC

LLC owners have multiple considerations when it comes to choosing a name:

  • The name must comply with the LLC-naming rules for your state of establishment.
  • The name must end with "Limited Liability Company," "Limited Company," "LLC," "L.L.C.," or "Ltd. Liability Co."
  • The name must distinguish your business from all other LLCs registered with the state, both foreign and domestic.
  • Some states prohibit financial terms that can be misleading to consumers, such as trustee, bank, or insurance company.
  • The name cannot include the words "Corporation," "Corp.," "Inc.," or "Incorporated."
  • The name cannot violate an existing trademark. You can do a trademark search on the United States Patent and Trademark Office website.
  • Avoid choosing a name that limits you to just one area of business. 
  • Make sure the domain name for your chosen business name is available. If a third party already owns that domain, it will be costly to purchase if he or she agrees to sell it.

If you plan to form an LLC under one name but use another name with the public, you may need to file a "doing business as" (DBA) or "fictitious business name" statement. When you choose a name, you can often reserve it for a small fee while you prepare to file your articles of organization. Once you officially file those documents to create the LLC, the name will be automatically registered to your business.

Publish a Notice

In some states (e.g., Arizona and New York), you must publish a statement of intent to form an LLC in your local newspaper. After you meet the publishing requirements, you must file an affidavit of publication with the Secretary of State before filing your Articles of Organization. 

File Articles of Organization

In some states, the Articles of Organization are called a Certificate of Organization or Certificate of Formation. The simple form can be downloaded from the Secretary of State website. You will need to decide on a registered agent, who agrees to receive any legal documents on behalf of your business. This can be a person or an organization. 

If you opt to serve as your own registered agent, you must be available to accept documents during normal business hours and your information will be publicly available. Consider using a professional registered agent service. In most states, your Articles of Organization are subject to a filing fee of about $100.

If you need help with forming an LLC, you can post your legal need 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.