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What is an LLC?
An LLC, or Limited Liability Company, is one type of legal entity that can be formed to operate a business. Forming an LLC provides a business owner with asset protection just like a corporation because it separates the business entity from the owners. The tax structure of an LLC is typically closer to that of a sole proprietorship because profits and losses are reported on an owner’s personal tax return. However, an LLC can also choose to be taxed as a corporation (either an S Corp or C Corp) if it meets certain criteria.
An LLC is just one way that a business owner can organize their business. Other options include:
- Sole Proprietorship: In sole proprietorships, one person owns the business and does not have the benefit of any liability protection.
- General Partnerships: A general partnership is like a sole proprietorship in that there is generally no protection for liability, but in this structure, two or more people own the business. General partners have personal liability for the partnership's debts and obligations, though they do enjoy liability protection from the actions of other partners.
- Limited Partnerships: In limited partnerships structure, general partners operate the business and have personal liability and limited partners while they contribute to the business, do not have personal liability.
- Corporation: A corporation ( S Corp, C-Corp, etc.) is owned by shareholders or stockholders and provides the most liability protection for owners. This business structure can be complicated because the shareholders must elect a board of directors to make business decisions and run the day-to-day operations of the business.
An LLC is a great option for small businesses just starting out because like a sole proprietorship, it is easier and less expensive to form than a corporation, and it provides protections for the owner just as a corporation would. The specific costs and requirements can vary depending on the state where the LLC is being formed.
For a more in-depth explanation of LLCs, click here.
What is an LLC Used For?
If you are starting your own business, there are a lot of things to take into consideration when choosing the form of a business entity like taxes, liability protection, ownership structure, management, and expenses.
An LLC will allow a business owner to limit their personal liability for business debts, raise capital from investors, and benefit from many tax advantages.
Although we generally associate an LLC with small businesses like the local coffee shop, even large multi-million-dollar business entities can be formed as an LLC. Some famous businesses that have an entity that is an LLC are:
- Exxon Mobile
- General Electric
- Apple
- Pepsi-Cola
- Nike
- eBay
Click here for more information about LLCs directly from the IRS website.
Benefits and Downsides to LLCs
An LLC will provide a business owner with both benefits and downsides. It is important to weigh these options when deciding which business formation is right for you.
Benefits of an LLC
- Limiting Personal Liability for Business Debts: An LLC protects an owner from certain liabilities, one of these is liability for business debts. An LLC separates the owner from the business so in the event of a lawsuit or claim of a creditor, only business assets are at risk to be claimed to satisfy a business debt. An owner’s personal property and assets like a house or personal bank account are protected. This is generally the most important reason a business owner chooses an LLC over a sole proprietorship.
- Ability to Raise Capital from Investors: The owner of an LLC has the option to bring in investors who can contribute additional capital, property, or even services to the business.
- Tax Advantages: When operating an LLC, the owner will not have to file a separate tax return for the business. LLCs are often called a “ pass through entity ” because profits and losses from the business pass through the business to the owner’s personal tax return. One benefit of this tax structure is avoiding the “double tax” that most corporations are subject to where income is taxed first under the corporation and then again at the individual level.
- Simplicity and Flexibility: An LLC is one of the most simple and easy to form legal entity. It is less expensive and easier to maintain because it does not require directors and shareholders like a corporation. An LLC also provides endless flexibility for a business owner. There are no limits on the number of owners allowed so an owner or owners can choose how to run and manage their business. An LLC with more than one owner can also choose how they want to be taxed whether it be like a sole proprietorship or like a corporation. Opting for an LLC to be taxed like a corporation has its own unique business benefits.
- Credibility: Forming an LLC makes your business its own legal business entity. This makes your business look and feel more professional and credible to consumers.
Image via Pexels by Christina
Disadvantages of an LLC
Even though the business formation of an LLC provides the owner with great liability protections, there are limits to this protection. An LLC owner will still be personally liable in a lawsuit for their own negligence, even if the claim is related to the business.
An LLC also does not protect an owner from losses due to fires, floods, lawsuits, or an economic downtown. Though, it does provide some liability protection, as the owner's personal assets are generally shielded from business debts and obligations. Nonetheless, it is important to carry business insurance on your LLC.
Another disadvantage of an LLC is the lack of investment opportunities. If an owner is seeking to bring in outside investors, there are no stock options available in an LLC like there are in a corporation. Normally, an investor will trade funding for a share in the business stock. Without the available stock, there is less incentive for an investor to invest in an LLC.
Who Should Form an LLC?
If you are debating whether an LLC is the right business formation for you, ask yourself these two questions: “Do I have co-owners or employees?” and “Does my business have significant risks?”. If you answered yes to either of these questions, an LLC would benefit your business.
If you have a co-owner or employees, your business could potentially be sued for the actions of these people. Without the protection of an LLC, the business owner’s personal assets could be at risk in this lawsuit.
Opening any business is risky, however some businesses pose more of a risk than others. Many property rental companies choose to use an LLC because each rental property will be its own entity. Failure or issues with one property will not put the other properties in jeopardy.
Click here to read about articles of organization, which are required to be filed when starting an LLC.
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How Are LLCs Taxed?
Tax advantages are one of the main reasons a business owner will opt for an LLC over a corporation. An LLC is taxed by what is called “pass-through taxation”. This means that the profits and losses of the business pass through the business and are filed with the owner’s personal tax return. The profits and losses will be taxed based on personal tax rates.
This tax structure is much like that of a sole proprietorship. The LLC owner will report their businesses profits, losses, and deductions to the IRS using a Schedule C form filed with their personal tax return. If there is more than one owner, each owner will file profit and losses with their own personal tax return.
To read more about pass through entities, check out this article.
Get Help Forming an LLC
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Meet some of our LLC Lawyers
Daehoon P.
Advised startups and established corporations on a wide range of commercial and corporate matters, including VC funding, technology law, and M&A. Commercial and Corporate Matters • Advised companies on commercial and corporate matters and drafted corporate documents and commercial agreements—including but not limited to —Convertible Note, SAFE, Promissory Note, Terms and Conditions, SaaS Agreement, Employment Agreement, Contractor Agreement, Joint Venture Agreement, Stock Purchase Agreement, Asset Purchase Agreement, Shareholders Agreement, Partnership Agreement, Franchise Agreement, License Agreement, and Financing Agreement. • Drafted and revised internal regulations of joint venture companies (board of directors, employment, office organization, discretional duty, internal control, accounting, fund management, etc.) • Advised JVs on corporate structuring and other legal matters • Advised startups on VC funding Employment Matters • Drafted a wide range of employment agreements, including dental associate agreements, physician employment agreements, startup employment agreements, and executive employment agreements. • Advised clients on complex employment law matters and drafted employment agreements, dispute settlement agreements, and severance agreements. General Counsel • As outside general counsel, I advised startups on ICOs, securities law, business licenses, regulatory compliance, and other commercial and corporate matters. • Drafted or analyzed coin or token sale agreements for global ICOs. • Assisted clients with corporate formations, including filing incorporation documents and foreign corporation registrations, drafting operating and partnership agreements, and creating articles of incorporation and bylaws. Dispute Resolution • Conducted legal research, and document review, and drafted pleadings, motions, and other trial documents. • Advised the client on strategic approaches to discovery proceedings and settlement negotiation. • Advised clients on employment dispute settlements.
Rebecca R.
An experienced commercial contracts attorney with sales, leasing, NDA, SEC compliance, corporate governance, commercial real estate, and employment experience. Also well versed in internal and external policy document and manual creation.
Sara S.
With over ten years of intellectual property experience, I’m happy to work on your contractual matter. I am very diligent and enjoy meeting tight deadlines. Drafting memoranda, business transactional documents, termination notices, cease and desist letters, licenses and letter agreements are all in my wheelhouse! Working in a variety of fields, from construction to pharmaceutical, I enjoy resolving any disputes that come across my desk.
Merry A.
Merry Kogut is a licensed attorney based in Washington State who has been a legal expert on JustAnswer since 2008 specializing in employment law, consumer protection and discrimination issues. She has been an attorney handling WA State phone consultations for Arag Legal Insurance since April, 2023. She has also been an attorney in private practice since 1986, and was in-house legal counsel for multiple WA State government agencies. She brings nearly 50 years combined legal and professional writing experience. Earlier in her career, Merry served as a law clerk for the Washington State Court of Appeals, and as a discrimination specialist, investigator and legislative liaison. She also helped establish the “Legal Writing Institute,” a national association of legal writing instructors and administrators. Merry earned her law degree from the Seattle University (formerly University of Puget Sound) School of Law.
July 26, 2023
Charles M.
Mr. McElvenny has extensive experience handling and developing strategy for complex commercial and real estate cases. He’s drafted hundreds of complaints ranging from simple breaches of contract to complex commercial claims including breach of fiduciary duty, constructive trusts and misappropriation of trade secrets. He has an excellent record in trial, arbitration and mediation. He also has significant experience in motion practice in both state and federal court. Through his work in corporate law, Mr. McElvenny has developed considerable experience with Limited Liability Company member disputes and general corporate governance. He’s drafted a number of industry-specific documents such as Operating Agreements (for Limited Liability Companies), commercial leases, settlement agreements and employment contracts. Mr. McElvenny has also represented criminal defendants in felony matters and assisted in the defense of civil matters arising from alleged SEC violations. He has represented individuals appearing before the Illinois Department of Professional Regulation as a result of SEC proceedings. After graduating with a B.A. in Philosophy, Mr. McElvenny proceeded from Loyola University-Chicago to DePaul University College of Law, receiving his JD from that institution in 2002. In 2010, he earned his Master’s of Science in Accounting from Loyola University-Chicago’s Graduate School of Business. Mr. McElvenny was selected to Illinois’ Super Lawyers Rising Stars in 2010, 2012 and 2013.
July 26, 2023
Marykaren R.
I provide legal advice and guidance on complex privacy laws and regulations including: Privacy Policies, incident response & state data breach notification laws, privacy risk and risk assessments, PIAs/DPIAs, contracts, and policies and procedures to help build consumer trust and ensure compliance. I am successful by encouraging collaboration with stakeholders to ensure a successful and sustainable program.
July 26, 2023
Tamla L.
Led by Tamla N. Lloyd, Esquire, our firm prioritizes a client-centered approach and aim to provide comprehensive, personalized services to help clients achieve their legal goals.
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LLC
Texas
Can an LLC formation be expedited?
I am starting a small business, and I am in the process of forming a Limited Liability Company (LLC). I need to get the LLC established as soon as possible, and I am wondering if it is possible to expedite the process. I understand that the formation process typically takes some time, but I am hoping that there is a way to speed it up, as I need to get the LLC up and running as soon as possible.
Darryl S.
yes - use one of services to move fast and pay a bit more for expedited registration.
Corporate
LLC
Connecticut
LLC and corporate restructuring?
I am a business owner that is looking to restructure my LLC and corporate structure to better suit the needs of my business. I am looking to expand my business and need to know the best way to restructure my LLC and corporate entities to manage growth and protect my assets. I am looking for advice on the best way to do this and any potential legal considerations I should be aware of.
Thomas L.
You need to categorize each asset and revenue source, and your personal tax situation, and amend or create entities as needed.
Corporate
LLC
California
How is management structure set post-formation?
I am in the process of forming a Limited Liability Company (LLC) and I am looking to understand how the management structure will be set up post-formation. I have a business partner who will be a co-owner of the LLC and I am interested in learning the best way to ensure that both of our interests are represented in the management structure. Furthermore, I am interested in learning what type of documentation will be needed to ensure that our management structure is properly set up and in compliance with applicable laws.
Sarah S.
When forming a Limited Liability Company (LLC) with a business partner, it's crucial to establish a clear and effective management structure to represent both of your interests. To do so, you should create an Operating Agreement, a customizable document that outlines the management structure, ownership percentages, and roles and responsibilities of each member. You can choose between a member-managed or manager-managed LLC, depending on your and your partner's roles and preferences. Defining ownership percentages, management responsibilities, voting rights, meeting procedures, and compliance with state laws is essential. Legal counsel should be consulted to draft the Operating Agreement and ensure compliance with specific state regulations, and it's important to regularly review and update the document to adapt to changes as your business evolves.
Business
LLC
North Carolina
How to amend details after LLC formation?
I recently formed a LLC for my business and I am now looking to make some changes to the details of the LLC. I am unsure of the process of making these amendments and am seeking advice on how to go about making these changes legally.
N'kia N.
Making changes to certain aspects of a North Carolina LLC is usually not very difficult, particularly if the LLC is recently formed. For example, if the desired changes are related to the LLC's Articles of Incorporation, filing amended Articles will likely be sufficient. Similarly, if the desired changes are related to the LLC's Operating Agreement, signing an amended Agreement will likely be the key. The processes for making other types of changes will vary based on the specific facts. When making changes to any aspect of a North Carolina LLC, it is important to comply with the LLC's operating agreement, the LLC statute, and other applicable laws. For legal advice on making changes to your North Carolina LLC, you should consider consulting with a knowledgeable business or corporate attorney. Good luck!
Corporate
LLC
Connecticut
LLC and confidentiality clauses?
I recently started a small business and am looking to form a Limited Liability Company (LLC). I want to ensure that the confidentiality of the LLC and its members is protected, as it is a very competitive market. I am looking for advice on what clauses I should include in the LLC documents to ensure maximum confidentiality.
Thomas L.
You should include a separate non-disclosure agreement for each person.
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