What is an LLC?

LLC, an abbreviation for limited liability company, is a type of business structure common around the world. An LLC combines the features of a sole proprietorship, partnership, and corporation.

A business or firm that is an LLC protects its owners from liabilities or debts; this means the members/ owners of the LLC won't be obligated to pay the company's debts from their personal and individual accounts. Liabilities and debts are limited to the business's account.

LLC is suitable for many types of businesses, and owners can be a single person or many individuals. An LLC operates under different laws depending on the state where it's situated.

The major reason why many opt for LLC is to avoid or limit business liabilities to a company and prevent their account from being exposed to business risks. Aside from this primary benefit, other advantages of LLC are discussed in detail.

Advantages of an LLC

Protecting Personal Assets

As mentioned earlier, an LLC protects the owner or owners of a business by excusing them from liability. Liabilities such as company shortcomings in the form of debts especially.

Debts incurred by the business are paid by the business or through the assets of the business. The personal accounts of the owners are exempted even when the business faces a lawsuit.

Individual Taxation

The tax payment method of an LLC is through the personal tax return of the owners. Each member of the LLC receives a share of the profits of their business and pays tax according to personal rates.

The owners will report the loss and profits of the business. Double taxation is prevented with an LLC -- the business won't pay taxes then the owners pay income tax again. The taxes would be paid by the members who bear the loss or earn the profit.

Flexible and Simple

An LLC is exempted from the restrictions of a corporation and sole proprietorship.

First, the number of members can be just an individual or a hundred people. Contrary to what happens in a corporation, board meetings and assigning a director or other administrative duties are not compulsory.

An LLC is also allowed to choose how to pay taxes. It can pay as an S-corp or C-corp.

Disadvantages of an LLC

Opening Cost

Opening an LLC is costlier than other types of corporations. An additional cost is the annual fees imposed by states on LLC.

The amount varies from state to state, and depending on the worth of the business, it may or may not be able to pay conveniently.

Limitations

An LLC won't be suitable for a publicly traded company. It also limits the investment from outsiders. Investors won't get to enjoy the "stock for money" opportunity as present in a corporation.

In a situation where a member dies or the business becomes bankrupt, the LLC can be dissolved depending on state laws.

How does LLC compare to other business structures?

Alternatives to an LLC include a corporation and a sole proprietorship.

A corporation has more formal procedures, requires ongoing paperwork, and is subject to stricter reporting requirements than an LLC. In addition, it has stockholders instead of members. There also must be a board of directors elected.

In a sole proprietorship, the owner has complete control over the business and pays taxes on a pass-through basis. This, however, is at the expense of unlimited personal liability. All business debts are the sole responsibility of the owner.

Comparison chart of LLC vs other business structures Corporation and Sole Proprietorship

How to Open an LLC

If you choose to open a business as an LLC either alone or with a number of partners you have to take note of the requirements in your state. Each state has procedures and laws which are unique to them in most cases. So, take note of these requirements and let them guide you through the process.

info icon Helpful resource: How to Register a Business

How much does it cost to form an LLC?

Depending on the state, the cost of forming an LLC may be different. In general, you can do all the work yourself for $100 to $200.

You'll spend most of the money filing your articles of organization. If you hire an attorney, this can cost much more. 

Do I need a lawyer to form an LLC?

Not at all. If you want to, you can form your LLC yourself. A lawyer is not necessary.

Which state should I form my LLC in?

Most businesses should form their LLCs in the state in which they operate primarily.

LLCs with locations in multiple states may be formed in a single state and then register in the other states. To do business across multiple states, companies need to be formally registered, file annual reports, and pay annual fees. 

How are LLCs taxed?

LLCs with a single member are taxed as sole proprietorships, while LLCs with multiple members are taxed as partnerships.

Owners of LLCs, however, have the option of taxing their business as a C corporation or S corporation. To do so, they need to file an election with the IRS using form 2553 for S-Corp election and form 8832 for C-Corp election.

Examples of Form 2553 and Form 8832 to elect as S-Corp or C-Corp

Single Member LLCs

Tax-wise, the IRS sees your LLC the same as a sole proprietorship. Therefore, the LLC itself isn't required to file an IRS return. However, if you are the sole owner, you are required to report all profits and losses on your personal tax return.

Multi Member LLCs

If you have multiple owners in your LLC, the IRS views your company as a partnership. The LLC itself is not taxed. The LLC owners instead file their own personal income tax returns to report their share of the LLC profits.

Regardless of whether your LLC distributed your share or not, the IRS expects you to report the distributive share each year. In addition, the multi-owner LLC must file a Form 1065 with the IRS.

Example of IRS Form 1065 Partnership Return

Members' shares are reported on this return and it is reviewed by the IRS to verify that LLC members are reporting their income accurately.

Get help with your taxes

Finding the right accountant has never been easier. In just 5 minutes, we'll get to know you, your business, and the kind of help you're looking for.

Contents