When setting up a business you’ll come across many options for the type of entity you can set up. A limited liability company (LLC) is just one of these choices.
An LLC offers one of the easiest ways to set up a legitimate business that protects owners from full liability such as lawsuits and serious financial ramifications. It is a common choice of legal entity for many new start-ups and pop-up businesses.
In this article, we’ll explain what this kind of business entity is and how it operates. You’ll find out the key benefits of starting your own LLC, how they compare to other structures like corporations and partnerships as well as how to set up a limited liability company.
What Does LLC Stand For?
LLC simply stands for Limited Liability Company. It differs from other types of smaller entities such as sole-proprietor companies and partnerships as it is 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 large personal losses should the business fail.
What Does LLC Mean?
An LLC is a business entity that limits the liability of the owner(s) both financially and legally. It is a simpler type of operation to set up compared to some of the other possible business categories like corporations and also provides a legal distinction between the company assets and personal assets of the founders.
These types of companies can comprise of:
- One owner as is the case for a single-member LLC, or
- Multiple owners, which is known as a multi-member LLC
In either case, the owner(s) are protected from some of the dangers of unlimited liability that could be experienced by a sole proprietor business or partnership.
Unlimited liability simply means that the owner of the organization is fully responsible for all the financial and legal obligations of the business. Therefore, this can put the owner’s personal non-business assets at risk should the company incur heavy debts or encounter any legal troubles.
LLCs instead limit the liability meaning that the owner(s) will be partially protected from severe business losses and any legal challenges.
What is a Series LLC?
A rarer type of this kind of business that exists is a Series LLC. This can only be formed in a few states and allows the creation of a single LLC that can be divided into two or more subdivisions.
This allows each subdivision to enjoy its own limitation of liability, management, and members. These can only be set up in:
- North Dakota
- District of Columbia
The way this works in practice is that an LLC with a number of locations can split each individual site into its own series with its own manager and liability. However, the way these functions are highly dependent on the individual state laws in question.
What Are the 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:
- Protection for the individual owner(s) against lawsuits
- Allowing the owner(s) to protect their personal assets
- Lowering the amount of legal paperwork necessary to set up and run
- Offering choices in the ways that tax on the business must be paid
- Providing safeguards to ensure that the company isn’t taxed twice
- Giving the business a more credible appearance to customers
However, whilst you need fewer legal forms to set up your business as an LLC, there are some disadvantages to this type of business. These are:
- It can slow down the process of completing your personal taxes as all members must receive a K-1 form from the LLC before filling in their tax return
- In some states, LLCs must be dissolved if a member dies or becomes bankrupt unless extra legal paperwork is put in place
Corporation vs LLC
Whilst corporations and LLCs have some similar legal structures, there are some key differences between these two types of entities.
LLCs allow small-to-medium businesses to operate fluidly without having to file taxes as a business nor are they required to follow formal business requirements such as holding annual general meetings.
Corporations, on the other hand, have many more legal responsibilities, given their ability to issue shares to raise capital and the extra transparency and fiscal requirements this entails. However, it still offers the protection of limited liability for its key members.
Corporations also can exist in perpetuity, unless they are formally dissolved. This is not the case for an LLC, which in some states will end if the owner or owners die or enter bankruptcy.
An LLC can also be converted into a corporation if the needs of the business change. This is a fairly simple legal process that will require you to submit a certification of conversion and register with your state to record the change.
Partnership vs LLC
Partnerships and LLCs can be quite similar in terms of their actual functionality, however, there is a big difference in their legal status.
The main distinction is that partnerships don’t offer the same level of protection that an LLC can. Business partnerships are normally unlimited in terms of liability which means the owners will incur all the debts of the company in their entirety.
How to Form an LLC
Setting up an LLC will vary depending on the state you are registering in. However, the process is broadly similar across the country and most steps are the same no matter where you’re forming the business.
If you decide you want to start an LLC you will need the following items:
- A name for the organization
- Completed articles of organization for an LLC
- It’s also recommended to complete an LLC operating agreement
These will then need to be recorded 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 might need to also publish your intention to start an LLC with a local newspaper as well.
Once the initial LLC registration is completed at a 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.