Limited Liability Company (LLC)

An LLC is a business structure that allows you to separate personal assets from business assets. It is essential to understand what an LLC can do in a business context.

Read on to understand what an LLC is and what an LLC stands for.

What Is the Meaning of LLC, and How Do They Work?

LLC stands for Limited Liability Company. It differs from other types of smaller entities, such as sole-proprietor companies and partnerships. LLCs are formally registered with the state via articles of organization and an operating agreement.

The “limited” element of the name refers to the fact that LLC owners are protected by “limited liability”. This means that the members have greater protection from incurring significant personal losses should the business fail. You typically do not need the help of an LLC services firm to establish your company. The key characteristics of an LLC include the following:

• Limited liability: Protects your assets from the company’s creditors and other liabilities.
• Pass-through taxation: An LLC avoids double taxation by excluding you or the business from paying federal income tax.
• Flexibility: Members or appointed managers can manage the company.
• Hybrid structure: Although owners are not typically responsible for business debts, you can choose how the company handles taxes.

How and where you set up your business determines how the LLC operates.

What Is a Series LLC?

You may establish different forms of limited liability companies. A lesser-known type of LLC is a Series LLC. These LLCs operate like holding companies, where several “subdivisions” operate under one “parent” LLC.

The most common reason for forming series LLCs is to protect assets in one subsidiary (series) from the liabilities of another. This allows each subdivision to enjoy its own limitation of liability, management, and members.

Only a few states allow the formation of series LLCs. These can only be set up in:

1. Alabama
2. Delaware
3. Illinois
4. Indiana
5. Iowa
6. Kansas
7. Minnesota
8. Missouri
9. Montana
10. Nevada
11. North Dakota
12. Oklahoma
13. Tennessee
14. Texas
15. Utah
16. Wisconsin

17. District of Columbia

    In practice, an LLC with multiple locations can split each site into its own series, each with its own manager and liability. However, their functionality is highly dependent on the individual state laws in question.

Benefits of Forming an LLC

Many people choose LLCs as their business’s legal entity, as they offer great flexibility and relative simplicity for the owners to set up and operate. However, there are many other reasons that you might choose to create a limited liability company.

Broadly speaking, these advantages include:

1. Protection for the individual owner(s) against lawsuits
2. Allowing the owner(s) to protect their personal assets
3. Lowering the amount of legal paperwork necessary to set up and run
4. Offering options for filing taxes
5. Providing safeguards to ensure that the company isn’t taxed twice
6. Giving the business a more credible appearance to customers

Furthermore, unlike sole proprietorships, where personal assets are at risk for business debts, an LLC protects against such liabilities.

However, whilst you need fewer legal forms to set up an LLC, there are some disadvantages to this type of business, such as:

1. Slowing down the process of completing your personal taxes, as all members must receive a K-1 form from the LLC before filing their tax return.
2. In some states, LLCs must be dissolved if a member dies or becomes bankrupt unless additional legal paperwork is put in place.

LLC vs. Other Business Structures

Limited Liability Companies operate distinctly from other business structures, as demonstrated in the table below.

How To Form an LLC

Setting up an LLC varies depending on the state in which you are registering. However, the process is broadly similar across the nation. Most steps are the same, regardless of where you’re forming the business.

If you decide you want to start an LLC, you will need the following items:

1. A name for the organization
2. Completed articles of organization for an LLC
3. It’s also recommended to complete an LLC operating agreement

You will need to record these with your local Secretary of State either in person or by mail. You will also need to pay the necessary state fees. In some states, you may be required to publish your intention to start an LLC with a local newspaper.

Once the initial LLC registration is completed at the state level, it will then be necessary to add the record to the Federal system. To do this, you will need to register for an Employer Identification Number (EIN). This will be necessary to set up company bank accounts or to hire new staff.

For professional services, such as medical or legal practices, consider forming a PLLC instead. These may offer added benefits, such as specific licensing requirements.

Start an LLC Operating Agreement now

Helpful Resources:

Cornell Legal Information Institute - LLC

IRS - LLC

Uniform Law Commission - Limited Liability Company Act

Cornell Legal Information Institute - Sole Proprietorship