In your excitement to start a new business, you found yourself cruising the web for information and discovered a recurring phrase: limited liability company.
Unsure what it means, here you are. Or, perhaps you’re an experienced veteran of LLC life and as you grow your business (or strike out on a new venture) you just want a quick refresher. Either way, welcome to your LLC crash course!
While the LLC is a relatively simple business structure, there’s still loads of important information to consider if you’re looking to form an LLC or maintain an existing one. But when formed correctly, this business type offers a ton of personal, legal, and tax benefits, and you’ll want to be cognizant of them all before diving in.
Quick Tip: If you need help starting an LLC or just want to make sure it’s done correctly, hire an online LLC service like ZenBusiness ($39) or LegalZoom ($99). They take care of all the legal paperwork so you can focus on what you do best.
What Is an LLC?
LLCs are unique among other business structures – and an ideal choice in many cases – because it mixes elements of sole proprietorships, partnerships, and corporations, giving entrepreneurs the best of all three. LLCs are taxed similarly to sole proprietorships in that the LLC itself does not owe income taxes. Instead, its owners include any company profits or losses into their personal returns.
Some aspects of LLCs, however, cross over into corporation territory, particularly when it comes to financial responsibilities. In an LLC, the owners or members are not often personally accountable for the business’ financial status. Plus, it sets the business apart as an entity separate from you as an individual so, if someone sues your LLC, your personal assets won’t be at risk.
In short, LLCs are so popular because they provide a variety of legal protections for your business while also enhancing your company’s credibility. As we go through this guide, if anything starts to sound overwhelming, there are plenty of reputable services that can help you through any and all steps of the LLC formation and ongoing compliance processes.
What Are the Benefits of Forming an LLC?
If you’re looking for a business structure that’s quick and easy to form, look no further. The LLC is your friend. Even though there are several steps involved and it can seem tedious, most entrepreneurs are able to DIY their LLC’s formation, given they have enough time to make sure every step is completed correctly.
But the benefits don’t stop there. In fact, they keep going – an LLC offers a whole swath of them, including:
- Limited Liability Status – The main reason to form an LLC is the liability protection you receive as a member/owner. You are not personally responsible for debts incurred by your LLC, and this often carries over to court judgments as well. If your company is sued, your personal assets will be shielded.
- Tax Flexibility – An LLC allows the members/owners to choose which type of tax structure they prefer. The three main options are:
- Single-member LLC – As the name indicates, this structure is taxed like a sole proprietorship. There’s no direct taxation on business profits or losses; instead, business income and expenses are taxed through the sole member’s personal returns.
- LLC Partnership – With this option, the IRS treats your LLC like a standard partnership. Rather, income and expenses pass through the company to the owners, who pay taxes on their share of profits or deduct their share of losses on their individual returns.
- LLC files as Corporation – In this structure, owners aren’t individually responsible for the company’s liabilities and/or debts. Creditors cannot come after your personal assets to pay your LLC’s debts.
- Less Paperwork Required – LLCs are governed by a set of default rules which vary by state. It’s a flexible business model that requires far less documentation than a corporation, for example. The compliance requirements are less strict, meaning they’re not just easier to form, but they’re also simpler to maintain.
It’s no wonder that the LLC is such a popular choice for new businesses. Effective, safe, and easy to form, they provide flexibility not available with any other type. And we could go on – these are the most common benefits but depending on the nature of your business, there could be plenty more.
How Much Does It Cost to Form an LLC?
They say the best things in life are free and while that may be true, forming an LLC certainly isn’t, but we think it’s pretty great anyway, totally worth the cost. In fact, there are often a few different fees involved with starting a business, mainly ones associated with document filing.
LLC formation fees can vary drastically depending on your state, so as you prepare your initial budget, it’s important to know how much you’ll be paying.
For example, the least expensive state for LLC formation is Kentucky, where it costs just $40. On the other hand, entrepreneurs in Massachusetts are required to pay a $500 fee to form an LLC. The nationwide average runs right around $136 ― just be aware that some states charge far more and some charge much less.
If you’re looking for a service provider to assist you with the formation process, there are a few excellent, reliable options like ZenBusiness and Northwest Registered Agent. These companies can handle your LLC filing and also offer a wide range of other business services.
What’s the Best State to Form an LLC?
To be perfectly honest, popular conceptions like “Delaware is a great state for LLC formation” or “Nevada doesn’t charge business income tax” can be a bit overblown, or at least overly generalized. In fact, in many cases, the simplest and cheapest state for LLC formation is the one you’re already based in.
Still, some states stand out due to certain policies and advantages. Here are a few examples:
Delaware – A unique advantage to forming an LLC in Delaware is the Chancery Court, a specialized court that exclusively hears business matters. Because Delaware is the only state with a court like this, any legal matters your business encounters will be resolved quickly, instead of dragging on for years like it can in other states.
In addition, Delaware LLCs benefit from their rather loose restrictions and minimal tax burdens. Generally speaking, Delaware is also a great choice for public corporations and for companies that transact business in multiple states.
Nevada – There’s a reason Nevada has a reputation as a tax haven — they have no state business income tax, capital gains tax, inheritance tax, franchise fees, or state corporation tax. Because the gaming industry generates such a tax windfall, Nevada doesn’t need to rely on traditional forms of business taxation, which can help keep more money in your pocket.
Aside from all the tax breaks, Nevada also allows for anonymous LLC membership, which can safeguard you from many types of lawsuits. In fact, as a Nevada LLC owner, you’ll only need to disclose minimal personal information, further protecting your personal privacy.
Wyoming – While not quite as popular as Nevada, Wyoming shares many of the same benefits. There are no business taxes or franchise fees, and you can retain your anonymity as an owner if you’d like. Furthermore, Wyoming also has an extremely low $52 LLC annual fee, one of the lowest in the nation.
One unique advantage to Wyoming is something called the “lifetime proxy,” which lets you designate someone to vote on your behalf in matters pertaining to your LLC. Why? Much like the anonymous ownership allowances, a lifetime proxy gives you the option to further mask your identity by having someone else hold your membership shares while you maintain the actual power.
All three of these states offer LLC owners unique benefits but we wouldn’t recommend moving there just to start your LLC. It’s often easiest to simply plant your business right where you are and watch it grow from there.
Should I Use an LLC Formation Service?
There’s a few factors at play here, primarily whether you want to spend the extra money to hire a formation service. If you do have the room in your budget, it can be nice to let someone else handle the hassles of assembling all of your formation documents.
Beyond just the hassle, any mistakes in your formation documents can cause major snags down the road. The peace of mind offered by LLC formation providers is a big part of their value. You can be confident that your documents are filed correctly by professionals who specialize in LLC formation.
And that’s not all. These services often offer valuable perks and extra services too. For example, some companies, like ZenBusiness and Northwest Registered Agent, include free registered agent service (more on that shortly) in bundles with LLC formation service.
Take ZenBusiness, for example. You’ll pay them $39 to start your LLC and they will throw in a year of registered agent service at no extra cost. This is considerably cheaper than paying for a year of registered agent service on its own. At that point, why not have them handle your formation too?
Which is the Best Business Structure?
The limited liability company might be the most popular business structure in the U.S., but that doesn’t mean it’s an ideal choice for every business. Choosing your business structure is a big decision, one you shouldn’t make without researching all of your options and weighing each one’s pros and cons.
One alternative to forming an LLC is obtaining a Doing Business As (DBA) name, which allows you to conduct business under an assumed name. A DBA offers many of the same advantages as an LLC, like the ability to open bank accounts and accept payments under your alternate name. It can give your sole proprietorship or small business more credibility even if you don’t need all of the protections provided by the LLC structure.
However, a DBA offers no protection from lawsuits, nor does it provide limited liability status. Operating solely under a DBA, you can still be personally sued for your business actions, as well as those of your partners or employees. Additionally, DBAs provide no special tax status provided — the individual or entity conducting business will still file taxes just as they would normally.
On the other end of the spectrum sits the corporation. Unlike LLCs, corporations have formal management and ownership structures with clearly defined roles for the company’s directors and officers. Even so, corporations give business owners a variety of options for taxation.
You have the choice of establishing either an S-corporation or a C-corporation. The S-corp is taxed much like an LLC’s “pass-through” method, whereas the C-corporation is taxed as a separate business entity. Additionally, corporations allow for greater flexibility when declaring business losses, determining stock interests, variable dividend scales, and more.
Each option has its own advantages and disadvantages, which you should evaluate as you consider the best option for your business. In general, the LLC format’s popularity is due largely to the level of legal protection it provides, while giving business owners the option for flexible company structures.
What Is an LLC Operating Agreement?
An operating agreement is a crucial step for an LLC because it defines your company structure while detailing ownership rules and operating standards. For an LLC with more than one owner/member, the operating agreement is especially crucial because it defines each partner’s responsibilities and roles. This helps prevent unwanted misunderstandings down the road.
It also helps your company avoid discrepancies involving money, as you can use it to outline how income will be distributed both during the LLC’s life and after its dissolution. Nothing, arguably, is worse for a business than disagreements over money, and the operating agreement can help prevent them.
The information in your LLC operating agreement will likely vary depending on your state of formation and the nature of your business. But for the most part, an operating agreement should include all of the following info:
- Each member/owner’s identity and specific role
- The rights, voting power, and percentage interests of each member
- Plans for the allocation of profits and losses
- Management structure outline
- Rules for meetings and the casting of votes
- Proposed actions for replacing a member if necessary
The operating agreement isn’t a legal necessity for most LLCs, but it is still a vitally important step in the LLC formation process, crucial to your company’s stability and future success, so we strongly recommend creating one. Additionally, an operating agreement doesn’t have to be fancy or complex — it’s a simple document that can help you avoid some tricky legal issues down the line.
What Is a Registered Agent?
Registered agents are essentially third-party entities that receive official documents on behalf of your LLC. From notifications of lawsuit filings to government correspondence, your registered agent will handle all of your important business correspondence, before forwarding them to you. This cuts out many surprises, as you’re never going to miss a vital piece of mail.
Your agent provides a reliable means of making official contact with your company. Without one, business owners could duck compliance requirements while hiding behind the excuse of not knowing anyone is trying to contact them. Likewise, a company that’s entirely within compliance guidelines could get sued without their knowledge.
Some states allow you to be your own registered agent, but we don’t advise taking on the role yourself. If you do, you’ll have to be available during all standard business hours and willing to put your personal address on the LLC’s public record.
What Is an EIN?
Even though your LLC won’t likely pay its own income taxes, it still needs an employer identification number (EIN). The EIN — also known as a federal tax ID number — is essentially a Social Security Number for your business, used to identify it in certain filings. The majority of LLCs require an EIN for things like opening business bank accounts, filing company taxes, hiring employees, etc.
One of the main reasons to get one is because you can use it instead of your Social Security Number, which keeps your personal privacy intact. You also might need an EIN to obtain certain necessary business licenses or permits.
What Is an Annual Report?
Your state wants to stay informed about your LLC’s changes and current information, so many will require businesses to submit a status report each year. These are simple documents that keep your state up to date on a few key pieces of business information.
Typically, these forms include your company address, the nature of your ownership (foreign or domestic), at least one member/owner’s name and address, the registered agent’s name and address etc. And if you fail to file, your LLC can fall out of good standing with the state and potentially incur other fines and penalties.
Note: Not every state requires an annual report. Some ask instead for biennial reports every two years instead, and others don’t require any reporting whatsoever.
There’s a reason the LLC is the most popular business structure in America today. Its flexibility caters to various business purposes and functions, and it allows you to choose the taxation options that best suit your financial structure.
When starting a new business, weigh all your options, but make sure to take a long, hard look at the LLC, as it may very well be the ideal choice for you. This site is a goldmine of LLC information, with extensive guides and resources for all 50 states. If you’re curious about LLC procedures, you’ve come to the right place. So go ahead and look around – you’re bound to find something interesting and helpful!