What is the full form of LLC? An LLC is a legal business entity derived from other business structures. It offers its members the same protection a corporation provides its shareholders minus the complexity. An LLC is the recommended framework for small businesses because it is less complicated than a corporation.

What Is a Legal Structure

A legal structure is formed at the state or federal level. These entities are sometimes recognized outside of the jurisdiction they were created. A company's legal structure is based on the following:

  • The business type.
  • Number of members, shareholders, or owners.
  • Liability risk.
  • Organizational structure.
  • Authority level.
  • Industry.

Incorporated Companies

You can identify an incorporated company based on its name — it usually includes Inc. Incorporated companies are legal entities aside from their owners. It protects its shareholders (the owners) from liability in lawsuits or judgments brought against the company. It also lives on past its owners. Corporations are well suited for large companies.

Limited Companies

Limited companies are structures used in Europe and Canada. A limited company does the following:

  • Shields its lawful members from liability from company debt.
  • Is double-taxed — the company pays taxes on profits, and the owners pay income tax.
  • Limits owners to the amount of their investment for company debt.
  • Has a pay-as-you-earn system for these companies in England.

Limited Liability Company

A limited liability company (LLC) is a hybrid of several other entities. It enjoys the liability protection like a corporation and pass-through taxation like a sole proprietor or a partnership. LLCs files only informational tax returns while their members report profits and losses on their individual tax returns.

How to Create an LLC

  1. Choose a name, and if your state's secretary of state allows you to do so, reserve it.
  2. Create and file your articles of incorporation. If your state requires you to put a notice in the paper announcing your intention to form an LLC, you must do that as well.
  3. Decide whether your LLC is member-managed or manager managed.
  4. Draft an operating agreement that includes, among other things, member shares and the decision-making process.
  5. Obtain an employer identification number (EIN) for your business.
  6. Apply for any permits or licenses you need before opening your business.

What's an EIN?

An employer identification number (EIN) is a unique identifier for your legal entity. You must separate your business transactions from your personal ones, or you are at risk for nullifying your LLC. An EIN allows you to do things like open a business account in your company name.

How Does an LLC Protect You?

An LLC limits your personal losses to the amount you invested in your business. It further protects you from lawsuits and judgments brought against the LLC. If a customer slipped and fell in your store and the business cannot honor the amount given in the lawsuit, that customer cannot hold you personally responsible.

Advantages of an LLC.

  • An LLC is easy to form.
  • You have the flexibility to decide how it is managed and how you will handle your taxes.
  • LLCs do not pay income taxes. Instead, the members include the profit and the losses on their tax return.
  • You do not have to be a U.S. citizen or a permanent resident to form an LLC.
  • You do have some liability protection from business debt or judgments.
  • An LLC structure gives your business more creditability,

Disadvantages of Starting an LLC.

  • An LLC limits your growth potential since you cannot have outside investors.
  • Each state has different statutes for LLCs. This can cause challenges if you have a foreign LLC.
  • LLC profits are subject to income taxes.
  • LLCs require annual reporting. Check with your state to see what that means for your LLC. Most states have a yearly fee for your LLC to remain legal. Other states have an annual fee. For example, California has an $800 minimum franchise fee even if you are not profitable or active.

If you are a small business owner in need of liability protection without the complicated structure, an LLC may be the right business type for you. Make sure you understand your state laws so that you do not risk losing your LLC status.

If you need help with deciding if an LLC is right for your business, 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