Understanding what is an LLC can be an important step when forming a new business. There are multiple business structures from which to choose, including:

  • LLC
  • C-Corporation
  • S-Corporation
  • Partnership

It is important to know the differences between these structures, their advantages and disadvantages, and which structure will ultimately be the best choice for your new company.

What Is an LLC (Limited Liability Company)?

An LLC, or limited liability company, can be considered an alternative business structure. The LLC business structure is similar to a corporation because it provides owners with a measure of limited liability protection. However, this structure also draws from elements of the partnership structure by allowing flexibility in the way the company's profits are divided among business owners.

In an LLC, members are not able to be held personally responsible for the company's legal and financial obligations. The term LLC stands for limited liability company. This particular business structure has quickly become popular among small business owners. This is because the LLC structure is easier to maintain and can be much more flexible than running a corporation.

Forming your business as a limited liability company is the easiest way to structure your business so your personal assets will be protected in the event that legal action is taken against your company. A limited liability company can have more than one owner. Owners of an LLC are typically referred to as "members."

There are two main types of LLCs, depending on how many members the company has:

There are also two main types of management structures found in LLCs:

In most cases, a limited liability company will be member-managed, meaning the members are also the company's managers and play an active role in daily operations. In some cases, however, members choose to appoint a manager to oversee the company's daily activities. This is known as a manager-managed LLC.

A document commonly referred to as the limited liability company operating agreement is used to document the LLC's members and the way the company is expected to operate. This is a legally binding internal document between all the company's members.

It's typically quite easy to determine whether the LLC business structure is right for you. If one or more of these are true for you, forming your business as an LLC is most likely your best option:

  • You don't plan to seek investments from outside sources
  • You think it may be necessary to protect your personal assets
  • You're interested in a flexible business model
  • You'd like to keep taxes simple and flexible

Limited liability companies offer the same liability protections as corporations without burdening owners with the formalities and complex requirements found in that structure. For this reason, LLCs are a great choice for a number of interested parties, such as:

  • Sole proprietors
  • Partners
  • Companies with multiple members

In fact, many new business owners decide the limited liability company is the best business structure to meet their specific requirements. However, some types of business are not allowed to form a limited company. These restrictions will vary from state to state but, for the most part, financial institutions such as banks, trust companies, and insurance agencies are not permitted to form as an LLC.

In some states, there are restrictions placed on certain industries as well. In California, for example, the following are prohibited from forming an LLC:

  • Architects
  • Accountants
  • Licensed health care providers

Types of LLCs

Your limited liability company may take on certain characteristics, depending on the specific structure of your company. Some of these characteristics include:

  • Domestic LLC
  • Foreign LLC
  • Member-managed LLC
  • Manager-managed LLC
  • Single-member LLC
  • Multiple-member LLC

A domestic LLC is formed when you intend to operate in your home state. Your local state authorities have the ability to determine whether you can form an LLC in their jurisdiction. A foreign LLC is formed when you intend to do business in a state other than your original state of incorporation. For example, if you originally formed your limited liability company in the state of Iowa and you intend to do business in Nebraska, you'll need to form a foreign LLC in that state.

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