Educational

What is an LLC?

If you’ve arrived at this page, you have probably already asked yourself the golden question: What is an LLC? If so, you’ve come to the right place. To summarize, most consider the LLC entity to fit somewhere between a Sole Proprietorship and a Corporation (also known as a C-Corp or Standard Corporation) because it gives more liability protection than the Sole Proprietorship, but is not as complicated as an S-Corp or C-Corp. Limited Liability Companies are separate legal entities and are governed by an Operating Agreement, which lays out, in writing, the details of the company, membership, etc. Click learn more about the LLC Operating Agreement: LLC Operating Agreement. To fully understand what an LLC is, continue reading below:

Registering an LLC

For your company to become an LLC, or Limited Liability Company, you must register with either your home state or a state that allows for non-resident registration. Many people prefer registering their LLC, S-Corp, or C-Corp in Delaware, for example, because they are a business-friendly state, allowing for efficient processing of corporate documents and have a dedicated “Court of Chancery” which is reserved for LLCs and Corporations only. If you to decide to register your LLC outside of your home state, you generally have to have a Registered Agent in the state where you form your Limited Liability Company. Registered Agents give the state a permanent contact to receive time-sensitive documents, and can be purchased for a very affordable price (usually less than $20/month).

As stated on the What is a Corporation page, your first step in forming your new business entity is doing a business name search. If you fail to do so, a serious delay can result in your business entity filing. To ensure that your name is currently available, check our Free Business Entity Search page, which is categorized by state and directs you to the specific state government websites to do a business name search.

LLC Liability

Unlike Sole Proprietorships or Partnerships, LLC’s provide your business with liability protection. What this means is that if your company forms an LLC and becomes indebted to a supplier or falls victim to a lawsuit, only your company’s assets are on the table. Nobody can come after your personal assets like your home or any income made outside of the business. The only downside to an LLC’s liability is that if you are looking for a start-up loan from a banking institution, most banks will ask you to put up your personal assets to secure the loan which, obviously, puts your personal assets on the table should you default on your debts. This is different than a C-Corp or S-Corp, for example, because rather than being owned by members (like an LLC), a Corporation is owned by Shareholders. This means that a Corporation could put a percentage of the company, or shares, as assets to secure the business loan. Many banks still will not offer loans to a newly established corporation, but it is something to keep in mind should your company need capital down the road.

LLC Taxes

For tax purposes, LLC’s are treated the same as Sole Proprietorships / Partnerships, unless you choose for your LLC to be treated as a corporation for tax purposes (don’t!). Most people who create LLC’s do so to avoid the tax complications that come with forming a corporation, so if you choose to form an LLC you most likely want to be taxed as a Sole Proprietorship / Partnership. This simply means that any earnings or losses from the LLC will pass through to you personally, and are reported on your personal income tax return (For more information, see Sole Proprietorship Tax section).

Bottom Line

LLC’s require much less paperwork and upkeep, so to speak, than that of a corporation but provide more protection than a sole proprietorship or partnership. There are also no shareholders in an LLC, and therefore no shareholder communication is necessary. Bottom line: If you’re interested in liability protection, but have no interest in having your company go public in the future, an LLC is probably the way to go.