A limited liability company (LLC) is a popular choice among small business owners for the liability protection, management flexibility, and tax advantages this form of business entity can provide. Set your business up for success by understanding the benefits and disadvantages of an LLC, how to start an LLC, where to form your LLC, and other key topics.
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A limited liability company (LLC) is a business structure that offers limited liability protection and pass-through taxation. As with corporations, the LLC legally exists as a separate entity from its owners. Therefore, owners cannot typically be held personally responsible for the LLC&#;s debts and liabilities.
The pass-through taxation of an LLC means that business income is not taxed at the entity level. Instead, any LLC income or loss as shown on this return is passed through to the owner(s). The owners, also called members, must then report the income or loss on their personal tax returns and pay any necessary tax.
If the LLC has a single owner, the LLC can be treated as a &#;disregarded entity&#;. In this scenario, a tax return does not have to be filed for the LLC, only for the business owner.
If the LLC has more than one owner, an information tax return for the LLC must be completed in addition to the individual tax returns of the business owners.
The benefits of creating an LLC &#; as opposed to operating your business as a sole proprietorship, general partnership, or corporation &#; typically outweigh any perceived disadvantages.
There are a few disadvantages to creating an LLC. (But in many cases, the advantages outweigh the drawbacks.)
LLCs are generally easier to form than a corporation, but there are some administrative and compliance tasks to be done. Although actual requirements can vary by state, these are the basic steps for forming an LLC.
You can choose to form an LLC in any state &#; even if the LLC won&#;t be doing any business there.
However, most LLC owners choose to form an LLC in the state in which they plan to do business &#; which in many cases is the state they live in. One reason is that if the LLC is formed in a state where it is not doing business (Delaware is a common choice for these LLCs), the LLC will also have to register as a foreign LLC (aka foreign qualify) to do business in the state where it is doing business, which can increase formation and administrative costs.
It&#;s important to note that formation fees, annual report fees, taxation, and LLC laws can vary significantly from state to state, making some states more advantageous for certain small business owners. Read more about how to select a state for LLC formation.
In order to form an LLC, you&#;ll have to choose a name that is not already on the Secretary of State&#;s records as being the name of another domestic or qualified LLC or other business entity. This is important to know since many sole proprietors already operating under a registered &#;doing business as&#; (DBA) name or trade name may want to use that as their LLC&#;s legal name.
To check the availability of the name you want for your LLC, whether it&#;s registered as your DBA name or not, you should conduct an LLC name search on your formation state&#;s website to determine whether your desired name is already in use. If you&#;re not ready to file your LLC formation document quite yet, it is a good idea to reserve the name. For a small fee, states will allow you to reserve a name for a short period of time.
It&#;s also a good idea to conduct a trademark search of the name you want to avoid intellectual property infringement.
In forming an LLC or registering an existing LLC to transact business in a foreign state, you are required to have a registered agent in the state of formation or qualification. Many new business owners are either unfamiliar with the term registered agent or do not know the purpose of a registered agent.
A registered agent, also known as an agent for service of process, receives important legal notices and tax documents on behalf of a business registered with the state. These include important legal documents, notices, and communications mailed by the Secretary of State (such as annual reports or statements) and tax documents sent by the state&#;s department of taxation. A registered agent also must be available to receive service of process (sometimes called Notice of Litigation), which are legal documents. These are typically a summons and complaint, that provide notice that a lawsuit has been filed against the LLC. Other court documents such as wage garnishment orders and subpoenas are also served on the registered agent.
While the owner of an LLC can choose to serve as the LLC&#;s registered agent, there are a number of compelling reasons why business owners choose a registered agent service provider to assist with this important requirement. Among other things, if the registered agent is not available when these time-sensitive documents are delivered, or if the person receiving them mishandles them, it can create serious problems for the LLC. The registered agent must also have a physical address in the state, and cannot use a PO Box.
An LLC operating agreement is required in nearly every state. And although in most states it can be oral, it is highly recommended that every LLC have a written operating agreement. As the name implies it is an agreement among the members and between the LLC and the member or members as to how the LLC will be operated. Even if you are the only member it is important to have an operating agreement. It shows you respect the LLC&#;s separate existence (and can help avoid piercing the veil), it gives you a chance to put in writing what you want to happen in certain circumstances such as if you can no longer manage the business and allows you to opt out of certain default provisions of the LLC statute that you might not want the LLC to be governed by.
It is particularly important for multi-member LLCs to have a well-drafted operating agreement. This document will clearly spell out the division of ownership, labor and profits, and often heads off disputes among the owners. It should detail, among things, who has authority to do what, what vote is required to approve certain transactions, how membership interests can be transferred, how new members can be added, how distributions, profits and losses will be split, and more. It is recommended that the operating agreement be reviewed by your attorney to be sure that all the bases are covered.
To make your new LLC officially exist you must file LLC formation documents (also known as a Certificate of Organization, Certificate of Formation, or Articles of Organization) with the Secretary of State&#;s office or whichever department handles business filings in the state in which you are forming. Filing fees vary across the U.S.
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Can an LLC be &#;incorporated?
Although it is common to hear of an LLC being &#;incorporated&#;, the correct way to describe the creation of an LLC (or any entity type other than a corporation) is to say that the business has been &#;formed&#; or &#;organized&#;. &#;Incorporation&#; and &#;Articles of Incorporation&#; are terms that apply to a corporation (regardless of whether it is taxed as a C corporation or S corporation).
What are LLC Articles of Organization?
While each state&#;s LLC formation document is different to some extent, there are several common elements. These include the following:
Standard forms for the Articles of Organization for an LLC are generally available from each state. The person who formed the LLC must sign the paperwork. In most cases that person does not have to be a member (owner) or manager. In some states, the registered agent&#;s consent to act as registered agent is also required.
Once approved and filed, the state will issue a certificate or other confirmation document. The certificate serves as legal proof of the LLC&#;s status and can be used to open a business bank account, obtain an EIN, and so on. Some states may also require that you publish a notice, often in a local newspaper, confirming the formation of the LLC.
Most LLCs will have to file a beneficial ownership information (BOI) report with FinCEN (U.S. Department of Treasury&#;s Financial Crimes Enforcement Network). A BOI report includes information on the individuals who ultimately own or control the business. Newly created LLCs that are not exempt will also have to submit information about the company applicant (the individual who directly files the document that creates or registers the LLC). For more information, visit the FinCEN website.
After establishing the business entity, you must apply to the IRS for an employer identification number (EIN). This is the identification number your LLC will use on all its bank accounts, as well as income and employment tax filings.
In addition, you will need to apply to the state's tax department for a sales tax identification number, and you may need to register with the state's labor department in each state the LLC will be doing business. Your business may also need to obtain one or more licenses and permits for each jurisdiction.
This step is not a legal requirement but is a key best practice for anyone who is creating an LLC and is one of the steps outlined in our guide: 10 steps to starting a business. It is crucial to separate business finances from personal ones. This is one of the main factors that courts consider when deciding whether to pierce an LLC&#;s veil and hold the member liable for the LLC&#;s debts. A business credit card can also be used to keep personal and business transactions separate, as well as to help build business credit.
Most banks require company details, such as formation date, business type, and owner names and addresses, and EIN.
If your LLC will be doing business in more than just the formation state, you will have to register &#; or foreign qualify &#; in each additional state. (&#;Foreign&#; refers to a state or jurisdiction other than your formation state.) Foreign qualification generally requires filing an application for authority with the Secretary of State. A Certificate of Good Standing is often required as well. The LLC will also have to appoint and maintain a registered agent.
Many factors are used to determine whether a company is transacting business in a state, and therefore needs to foreign qualify. Some of the common criteria include whether your company -
Note that different states have different criteria. To determine whether your LLC needs to foreign qualify in a certain state, it is best to seek the legal advice of an attorney.
When forming a business, one of the most important steps is deciding on the business structure. There are several business entity options available that each present different advantages and disadvantages.
LLCs versus C Corps, S Corps, and DBAs
Understand the key benefits of LLCs, C Corporations, S Corporations and DBAs before deciding which entity type is right for you. Read our article Comparing company types: Understanding C Corp, S Corp, LLC and DBA Business Structures.
LLCs versus S Corps
While the S corporation and LLC both have pass-through taxation, the S corporation lacks the flexibility of an LLC in allocating income to the owners. Additionally, an LLC may offer several classes of membership interest while an S corporation may only have one class of stock. Visit our article on LLCs versus S corporations to learn about other key differences.
LLCs versus Partnerships and Sole Proprietorships
Learn about the advantages and disadvantages related to taxation, asset protection and other key criteria faced by LLC owners, sole proprietors and partners, whether general or limited partnerships in our article Sole Proprietorships, partnerships ,and LLCs are commonly used entities.
When forming a business, one of the most important steps is deciding on the business structure. There are several business entity options available that each present different advantages and disadvantages.
Pillar 2 focuses on a company&#;s activities to reduce its value chain emissions, following the same trajectory. These include all emissions &#;outside the company walls&#;, which often represent the largest share of a company&#;s total footprint and must therefore be addressed. Value chain emissions (scope 3) include emissions from upstream and downstream activities.
The 1.5°C Supply Chain Leaders is an initiative driving climate action throughout global supply chains
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