What Is LLC in USA?: Everything You Need to Know
An LLC refers to a business entity that combines the tax advantages of a partnership with the liability protection of a corporation.3 min read
2. Pros and Cons of an LLC
3. How to Set Up an LLC in the U.S.
Updated November 23, 2020:
“What is LLC in USA?” is a question that entrepreneurs who wish to establish a limited liability company (LLC) in the United States should ask. An LLC refers to a business entity that combines the tax advantages of a partnership with the liability protection of a corporation. While it is a popular business structure in the U.S., it may not be the ideal option for some businesses. Therefore, it is essential that you learn about the pros and cons of an LLC before you form one.
What Is an LLC?
An LLC is a type of business structure that offers the personal liability protection of a corporation, while giving its owners the flexible organizational and tax structures of a partnership. Since it has features of both a corporation and a partnership, it is also referred to a “hybrid” entity.
In an LLC, the owners are known as members, while the people who manage its operations are called managers. An LLC does not have to appoint managers. In an LLC with only one or two owners, a member can also serve as a manager. A larger LLC faces greater risk if its members have all the ability to dictate its obligations with their signatures. As such, it is a good idea to have specific managers in charge.
All LLCs are required to have a minimum of one member at any time. A member of an LLC can be a person, partnership, another LLC, corporation, or a trust, and does not have to be a citizen or resident of the U.S.
Pros and Cons of an LLC
- Pass-through taxation – An LLC is not required to pay taxes at the corporate level. Its owners report their profits or losses on their personal tax returns, meaning that they are not subject to double taxation.
- Legal protection – An LLC gives its owners protection against personal liability for its debts and financial obligations.
- No residency requirement – A member of an LLC does not have to be a U.S. citizen or permanent resident.
- Better credibility – Investors, suppliers, and lenders tend to look upon an LLC more favorably.
- Limited growth potential – An LLC is unable to issue shares to attract investors.
- Self-employment tax – The income of an LLC may be subject to self-employment tax.
- Tax on appreciated assets – You may be required to pay taxes on appreciated assets if your business is converted to an LLC from another legal structure.
- Lack of uniformity – Different states may have different rules and regulations for LLCs.
How to Set Up an LLC in the U.S.
Name Your Business
To form an LLC, the first thing you need to do is select a business name. In most states, you are required to choose a business name that ends with “Limited Liability Company,” “LLC,” or another variation. Each state has a list of prohibited words for LLC names, such as “insurance,” “bank,” or “trust.”
Also, you can't use the same name that another business in your state is already using. Most states have a business search database on the websites of their Secretary of State offices. You are also not allowed to use a name that someone else has already trademarked. To find out if your chosen name is available, you can check the trademark database on the website of the U.S. Patent and Trademark Office.
Appoint a Registered Agent
If your LLC faces a lawsuit, you need to have a registered agent to receive legal documents on your company's behalf. The registered agent can be a founder of your LLC or a company.
File the Articles of Organization
Depending on your state, the Articles of Organization may also be referred to as the “Certificate of Organization” or “Certificate of Formation.” You are required to file this document with the Secretary of State. Your Secretary of State office should have an Articles of Organization template that can be downloaded online. In some states, the Articles of Organization can be filed online.
Also, you are required to pay a filing fee when forming an LLC. The fee varies from one state to another, but it is usually less than a couple of hundred dollars.
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