What Is An LLC?

What Is An LLC?

LLC stands for Limited Liability Company and is a type of business entity allowed by the state statute. The sorts of businesses that are eligible to form an LLC are determined by state law. Several firms can incorporate an LLC, except for banks and insurance companies, which aren’t allowed to do so. Some states restrict the services that LLCs can provide. For example, in New Jersey, you will be required by law to form a PLLC if you intend to incorporate a business providing professional services. The number of members an LLC can have is also determined by the legislation of the state where the LLC is based.

Company owners who want the liability protection that a corporation may give minus the extra taxation might consider founding a limited liability company (LLC). An LLC is a hybrid form of company structure in which the LLC’s owners are referred to as “members,” and all benefit from the benefits that an LLC provides. LLC members might be sole business owners, a group of partners, or another business. This article will explain how an LLC works and the steps involved in creating one, including:

  • LLC meaning
  • The Advantages of forming an LLC
  • Who Should Form an LLC?
  • How to start an LLC in 2022
  • Top Two LLC formation services
  • Frequently asked questions about LLCs.

What is an LLC? 

A limited liability company (LLC) is a business entity that can be created to be operated and managed as a separate entity from its members(owners of LLC are called members). That is to say, an LLC can acquire assets and apply for loans, bid for contracts, and can be sued in court in a manner that ensures the company stands for itself without liabilities for the members. In layman’s terms, you can only sue an LLC for an issue about the company, not the members.

Finally, members of LLCs are not required by law to use their personal assets to get a loan to pay off the LLC’s debts and other obligations. Aside from securing your assets, limited liability firms can provide several additional advantages. Let’s get started straight away on these advantages:

LLC Advantages

Other business structures, such as an s corporation, general partnerships, and sole proprietorship, have different benefits. Still, the LLC is more prevalent among small businesses due for the following reasons:

Limited Liability protection 

As earlier stated, an LLC is an independent legal business entity that can acquire assets, apply for loans, bid for contracts, and be sued in court. Members are immune from personal liability for the LLC’s and its other members’ actions. Lenders cannot seize the owners’ assets to satisfy business debts. On the other hand, Creditors can claim the personal assets of a sole proprietorship and general partners against the business debts. In shh

Members are also shielded from the actions of other members and employees; A real-life example would be if a firm employee is implicated in court following professional malpractice claims. The court may launch legal action against the company for damages and compensation. The court may seize the business assets but not the owner’s personal assets to compensate for the damages.

Pass-through taxation 

According to the legal information institute, Pass-through taxation refers to business entities that do not pay taxes on the entity level. Instead, the income passes to the company owners, who pay personal income taxes for their share of the business.  

This implies that the business income or loss is “passed through” to owners and billed on their personal tax returns. Both an S Corporation and partnership are also pass-through entities in addition to LLCs. Also, a C corporation does not fall within this category. 

Simplicity  

LLCs are straightforward to manage; Limited liability companies are exempt from several corporate regulations, such as holding annual shareholder meetings or having a board of directors. As an alternative, members of an LLC are free to arrange whatever they see fit: Anyone who is a member of the company’s management has the right to run the company as they wish. An LLC is an ideal alternative for new company owners who don’t want to deal with a lot of paperwork.

Flexibility in ownership 

An LLC can be owned by more than one owner. Members can be individuals, foreigners, partnerships, trusts, or companies, and you could have multiple members. For example, an S corp is far more regulated regarding who may be a member, and a limit of members can own the company as against a multi-member LLC. 

Members can also opt to have voting power according to their objectives or equal rights regardless of their ownership percentages.

Options for Management 

One of the primary advantages of an LLC is that it gives LLC owners freedom and alternatives for business management. Management, in essence, pertains to the day-to-day activities of an LLC. The members may handle the business in one of two ways: manager-managed or member-managed.

A member-managed LLC vests management responsibility on the LLC owners (referred to as “members:”). Each owner has a say in decision-making. Based on the terms of the operating agreement, the owners may have an equal voice, or power may be proportionate to the degree of ownership in the firm.

While In a manager-managed LLC, the members designate management or managers to handle day-to-day business decisions. Members maintain some influence over the corporation, such as the ability to dissolve it. Having said that, the manager is the primary legal representative of the LLC and may make decisions on its behalf quickly.

Flexibility in taxation 

In addition, LLCs provide more tax flexibility than other forms of business. An LLC with one or more members is taxed as either a sole proprietorship or a partnership. Taxes on company gains are deducted from members’ tax returns, which each member files. Self-employment taxes (Medicare and Social Security) apply to members who work in the company, so they must pay them from their earnings.

How To Start An LLC in 2022

What Is An LLC?

Creating an LLC is a straightforward process. At the same time, the procedure may differ depending on the state. Generally speaking; however, the following are the standard procedures followed by most states:

  • Select your state of choice. Business owners are typically advised to choose their home state, but if for any reason you don’t want that, you can check our article on the best five states to form an LLC.
  • Choose an appropriate name.
  • Choose a registered agent.
  • Create an operating agreement
  • File the LLC with the secretary of state’s office
  • Obtain an EIN from IRS

Select your state 

When you decide to create a limited liability corporation (LLC), you can do it in any state, independent of where you live. However, in most cases, your home state will be the most cost-effective alternative. One explanation for this is that if the LLC is founded in a state where it will not be conducting business—for example, Wyoming—the LLC will have to incorporate as a foreign LLC in the state where it will be doing business, which may raise formation and administration expenses.

So, even if you formed your company in Delaware, Nevada, or Wyoming, you would still have to submit documents in your home state and abide by their laws, giving up any tax or expense benefits, paying double initial filing fees, and incurring double taxation. You should also note that LLC laws vary by state.

Name your LLC

Marketing is usually at the top of the list of considerations for most small business owners when deciding on a company name. Although choosing the proper name for branding reasons is vital, your company name must also comply with state law.

Firstly, If you want to create an LLC, you’ll need to come up with a unique name that isn’t currently being used by another domestic or qualifying LLC or other business organization in the state. Also, the terms “insurance” and “banking,” for example, are generally prohibited in most states. In states like New Jersey, you’ll almost certainly have to add “LLC” or “limited liability company” to the end of your business name.

It’s also a wise option to do a trademark check of the name you want to prevent intellectual property infringement or to mislead your customers.

Choose a Registered Agent

When incorporating an LLC, most states require that the company name a registered agent. Your chosen agent must be either a resident of the state where you do business or a company allowed to do business in that state.

A registered agent must also be accessible to accept service of process (also known as Notice of Litigation), which are legal documents— usually a subpoena or a  complaint—that convey notification that a suit was lodged against the LLC. Garnishment orders and subpoenas are other court papers issued to the registered agent.

Anyone over 18 may be a registered agent, and you can designate yourself or an employee. However, the agent must be accessible during regular business hours at a location inside your state. You may also name a corporation that serves as an agent. Of course, there will be a cost; LLC’s registered agent fees may exceed a hundred dollars yearly

File the articles of organizations 

To formally establish your new LLC, you must submit LLC articles of organization (also known as a Certificate of Organization, Certificate of Formation, or Articles of Organization) with the Secretary of State’s office or a contracted LLC formation services in the state in which you are creating.

Each state will include criteria and processes for people attempting to incorporate an LLC.

You will need to file the following basic information:

  • Your company name
  • Your company’s HQ 
  • Written LLC operating agreement 
  • Your management structure 
  • Contact details for the registered agent (as well as the agent’s signature in specific locations)
  • Your LLC life span

In most states, You may download the articles of organization for an LLC from the state’s website. The documentation must be signed by the individual who founded the LLC. You don’t necessarily have to be a member or manager. Certain states may also need to obtain the registered agent’s permission to operate as a registered agent.

The average state filing fees are about $100 to start an LLC 

Create an LLC Operating Agreement 

An LLC operating agreement isn’t required in the majority of states, but it’s a brilliant idea all the same. Internal company choices need a sound business structure, and that’s what LLC’s operating agreement gives them.

More precisely, it might cover how members split revenues, how membership interests are protected, exit the LLC, and who provides cash for the firm. It should, in essence, include all pertinent information about your LLC’s activities.

An operating agreement is essential, even if you’re the only one involved. It demonstrates your regard for the LLC’s separate existence. In addition, it may assist protect your limited liability company’s status by establishing that your LLC is a genuine business organization. As long as you don’t have an agreement, state law will determine how your LLC is run.

Get An EIN 

After forming the business legal entity, you must apply for an employer identification number with the Internal Revenue Service (EIN). An Employer Identification Number (EIN), also known as a Federal Employer Identification Number (FEIN) or Federal Tax Identification Number (FTIN), is your LLC’s equivalent of a Social Security number (SSN). To recruit staff or create a company bank account, you’ll require an EIN.

Also, you must contact your state sales tax agency for a sales tax identification number, and You must notify the labor department that the LLC will be operating in the state.

The Top 2 LLC Services

ZenBusinessNorthwest
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ZenBusiness

Zenbusiness is an Austin, Texas-based company. The firm was created in 2015 and is best recognized for delivering outstanding and professional LLC services. Zenbusiness provides business technologies and services to assist entrepreneurs in establishing, operating and growing their businesses.

Northwest

Northwest mainly provides agent services but also assists with company formation. The corporation was founded in 1998 and is based in Spokane, Washington. While Northwest is smaller in comparison to other LLC service providers, it concentrates on offering quality services that other businesses do not give.

Final Thoughts

Though there has been much debate on the subject, it is clear that an LLC comes with a lot of benefits for many new business owners with the most beneficial being personal asset protection, unlike an s corp.

This is made evident by the fact that over the course of this past decade, more business operations have chosen to incorporate themselves as an LLC, unlike s corporations. Additionally, 

Apart from personal asset protection, Limited Liability Company offers other benefits such as low-income tax, liability insurance,  distribution of profits/losses, dealing with new and departing workers, and tax election. For small businesses or a new business owner planning to form a business, an LLC is the best option. 

Frequently Asked Questions (FAQs)

What does owning an LLC mean?

Suppose you’re a business owner or manager in the United States looking to safeguard your assets from personal responsibility while maintaining a partnership’s convenience, adaptability, and tax benefits. In that case, you might consider setting up an LLC. Members are the owners of LLCs.

What are the benefits of having an LLC?

A limited liability company offers several benefits, including tax advantages and flexibility, management options, etc.

What Is an Organization article?

An article of organization, also known as a certificate of formation or certificate of organization in various jurisdictions, is a document particular to LLCs that provides the first statements required for founding an LLC in most US states.

Should I form an LLC on my own or pay someone?

You could be able to form an LLC on your own, mainly if it is a single-member LLC. Do your homework and go to your state’s company formation website to find the needed papers. Nevertheless, before starting any company, get expert counsel to ensure you choose the best option for your position.

What if I fail to use my LLC?

If you do not use your LLC, you may be held accountable for the LLC’s bills and taxes. You must use your LLC and submit a tax return as the state requires.

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ABOUT THE AUTHOR

Hannah Collymore
Hannah Collymore
Business Writer

ABOUT THE REVIEWER

He is an organized and creative thinking sales management professional with experience in outside and inside sales in various markets. Working as freelancer in the Greater Boston Market, he moved to St. Louis and became an Account Executive, then a Sales Manager managing and coaching 12 sales reps covering a nationwide territory. He has developed his team with a combination of consultative selling and value before price coaching mindset which has won him a President’s Cup and many other financially rewarding awards at RICOH. His most recent role as a Continuous Improvement Manager provided insight into the importance of delivering a quality product in alignment with the value and reputation of his organization. It further enhances the aspect of selling on value as opposed to price.

+ 1 sources

Bizreport Advisor adheres to strict editorial integrity standards avoids using tertiary references. We have strict sourcing guidelines and rely on peer-reviewed studies, academic research. To ensure the accuracy of articles in Bizreport, you can read more about the editorial process here.

  1. LII / Legal Information Institute. (2021). 26 CFR § 301.7701-5 – Domestic and foreign business entities. [online] Available at: https://www.law.cornell.edu/cfr/text/26/301.7701-5 [Accessed 7 Jul. 2022].
  2. Contents. https://www.irs.gov/pub/irs-pdf/p3402.pdf