What Is an LLC (Limited Liability Company)?

An LLC is an abbreviation that stands for limited liability company, a type of business entity that limits personal liability for business debts and legal judgments. While new business owners were once limited to partnerships and corporations, LLCs and limited partnerships (LPs) are newer structures available for entrepreneurs.

In addition to limited liability, an LLC also offers the same tax benefits as a partnership. An LLC can be owned by:

  • An individual
  • Several individuals
  • A trust or estate
  • A corporation
  • Another LLC. 

LLC owners are referred to as members. Most LLCs are managed directly by their members, but some appoint a nonmember to conduct daily operations.

State law governs LLC creation and management. LLC benefits include easy establishment and flexible structure. However, you may not be subject to personal liability if legal or reporting requirements are neglected or fraud has occurred. Establishing an LLC also carries tax benefits and adds an air of legitimacy to your new business. 

Types of LLCs

Common types of LLCs include the following:

  • A domestic LLC: Operates in the same state where it was formed.
  • A foreign LLC: Has a business presence or location in a state other than where it was formed.
  • A professional LLC: An entity formed for a legal or medical practice and requires one or more members to be licensed by the state for the profession in question. The liability protection afforded by the LLC structure is not valid for claims of professional malpractice.
  • A series LLC: A group of companies housed under one parent LLC. Seventeen states currently allow series LLC formation.

Advantages of Starting an LLC

Some of the benefits of forming an LLC include:

  • Flexibility in ownership and management structure
  • The ability to elect tax treatment as a C or S corporation. LLCs and S corps are subject to pass-through taxation, eliminating the need to file a separate tax return for the business. Owners receive profits directly and report them on the individual tax return. This allows the LLC owner to avoid double taxation, which occurs for C corporations when owners are on taxed on profits when they are both received and distributed.
  • LLCs are easy to maintain and have minimal government reporting requirements. An LLC must file an informational tax return each year, along with Form 1065 if the company has more than one member.
  • An LLC can determine how it distributes profits to members, regardless of each member's ownership interest.
  • An LLC does not need to be formed by a U.S. permanent resident or citizen.
  • Business owners have limited personal liability for the company's obligations and debts, as long as fraud has not been committed.
  • Forming an LLC increases your company's credibility with potential clients, lenders, investors, suppliers, and partners.
  • When you create an LLC, your business has a separate credit file and can apply for credit lines and loans for business expenses.

Disadvantages of Starting an LLC

Business owners who want to establish an LLC may face the following challenges:

  • Because an LLC cannot attract investors by issuing stock or going public on the stock exchange, the potential for growth is more limited than with a corporation.
  • In some states, the LLC is terminated if an owner dies or leaves the company. A corporation, on the other hand, is a permanent entity unless it is purposely dissolved.
  • LLCs are subject to different laws in different states.
  • LLCs are charged self-employment tax unless they elect to be taxed as an S corporation.
  • If you convert an existing business to an LLC, you may be taxed on appreciated assets.

Is Creating an LLC Right for Me?

To determine whether an LLC is the right structure for your company, consider both your short- and long-term business objectives. Consider the advantages and disadvantages listed above and how they would impact your specific situation.

How to Create an LLC

To create an LLC, you'll need to file Articles of Organization in the state where you plan to do business. This document must include:

  • Your name and address
  • The name and address of the business
  • The name and contact information of the registered agent.

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.