What is an LLC and What Does it Do? [A Complete Guide]

A limited liability company (LLC) is an entity type where owners are legally separate from the company. It protects business owners from liability claims and offers several benefits.

What is a Limited Liability Company (LLC)?

A limited liability company (LLC) is one of the several entity structures used for business registration. It separates the legal entity of a business and its owners.

An LLC is a commonly used entity structure for small businesses. It protects business owners from liens and business liabilities. In simple words, it protects owners’ assets if the company is liable for any debts.

Owners of a limited liability company are called members. Unlike other entity structures, it’s difficult to change the members of an LLC once registered.

Limited liability companies are governed and registered by state statutes. So, the exact compliance and registration requirements may vary by state.

LLCs combine the benefits of partnerships and corporations. So, small business owners can save taxes and protect assets from unlimited liabilities.

How to Form a Limited Liability Company?

Forming a limited liability company is not a challenging task as compared to incorporating a business as a corporation.

Follow these simple steps to form an LLC easily.

Select a State for LLC Registration

Registering a limited liability company is governed by state laws. Each state offers different formation costs, tax incentives, and licensing costs.

Also, you may need to register as a foreign entity in some states if you are doing business in one state and registered in another.

So, the first step for you is to choose the state for company registration.

Choose a Unique Business Name

Business registrar offices register a unique business name once. So, the next step is to carefully choose a business name.

You can conduct a name search on business directories and business registrar’s website for your state. You can use a trading name or any other suitable brand name here.

Apply Through a Registered Agent in Foreign States

You may need to follow an additional step here if you are residing in one state and want to register a company in another.

If you want to register a limited liability company in another state, then you must apply through a registered agent in that foreign state.

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A registered agent works as an authorized person to collect tax and registration documents on behalf of the LLC.

LLC Article of Organization

An authorized person like a registered agent or the business owner must sign the article of organization for a limited liability company.

Most states will provide their unique formats for the article of organization agreements. It is a similar document to an article of association used for corporations.

Create an LLC Operating Agreement

Some states may require submitting an operating agreement as well. It is an agreement between the members of a limited liability company.

This agreement defines the ownership stakes, profit/loss contributions, and operational duties for all members. It may formally include different terms and conditions of the business including the ownership transfer and conducting the business.

Apply for an LLC Registration

Once you have completed the documents and registration information ready, it’s time to formally apply for an LLC registration.

You can check with the state departments of labor to submit the registration documents. Most states accept online business registration applications these days.

Obtain an EIN

Once your business registration is complete and you get a business name, you should then register for an employer identification number (EIN).

The EIN is issued by the Internal Revenue Service (IRS) to all businesses filing federal tax returns. At the same time, you must get a state sales tax identification number as well.

Additional Steps

Then, there are a few relevant but additional steps to consider for an LLC at this stage although these are not mandatory.

You may consider opening a business bank account for the company for maintaining separate financial records of your business. It is an excellent practice to maintain transparency and accountability for any business.

Finally, if you consider conducting business in other states, registration in other states is an additional step that you can take here. Although you can choose to register in a different stage when you open a new branch later.

Who Can Form an LLC?

Limited liability companies are regulated by states. Most states allow all types of applicants to form an LLC.

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It means individuals, business entities, foreigners, foreign businesses, corporations, and other LLCs can register a limited liability company.

Most states also allow single-member LLCs. There is no restriction on the maximum number of members for a limited liability company too.

Although the exact requirements vary by state, most states do not allow banks, insurance companies, and other financial entities to form a limited liability company.

Once formed, a limited liability company can perform any business activity as any other business entity can do. However, these business activities must be registered with the state regulators when forming the LLC.

What are the Advantages of an LLC?

A limited liability company or LLC structure comes with several advantages for business owners.

Limited Liability of Business Owners

Business owners are protected from liability claims from creditors with an LLC structure. It means their personal assets cannot be liquidated if the company fails to repay debts.

Similarly, if there is more than one member, each member remains protected from the acts of other members in the LLC.

Flexibility and Simplicity for Members

Forming an LLC is a simple procedure. You do not need to follow strict compliance requirements like having a board of directors, annual general meetings, and stricter accounting standards.

Similarly, there are no restrictions on the maximum number of members of an LLC. It can be formed with only one member too.

Pass-Through Taxation

A limited liability company can elect to pass-on taxes on its members. Members can pay taxes as individuals rather than paying higher corporate rate taxes.

Unlike corporations, LLC owners do not get taxed twice. However, both entity structures can elect to pay taxes at the entity level as well.

Simple Management Structure

Owners of a business in an LLC structure can run the business. There are no compliance requirements for establishing a board of directors, appointing directors, and restricting owners from business management.

Business owners have the choice of appointing directors and business managers. So, it offers a simple and flexible management structure.

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Instant Credibility

A limited liability structure is commonly used by small business owners. Forming a business with an LLC entity structure gives the business credibility.

It helps them apply for business credit and form trade relationships with other businesses formally.

Fewer Compliance Requirements

A key advantage of running an LLC is fewer compliance requirements from regulators. It is particularly useful for small businesses.

Running an LLC is easier than a corporation that requires stricter compliance requirements from regulators.

What are the Disadvantages of an LLC?

Despite several advantages, a limited liability company comes with some disadvantages as well.

Costly Entity Structure

Although the exact costs for running an LLC are different by state, it is generally more costly than forming a general partnership or sole proprietorship.

Some states may charge higher registration and running charges for an LLC as compared to partnerships or sole proprietorship structures.

Difficult to Change Ownership

Although it’s easier to form an LLC, changing or removing members is a difficult process. State regulators may require several types of documents before changing the ownership status formally.

All members must agree on adding or removing a member from the formation too. Unlike a corporation, a single member cannot sell shares without the consent of other members in a limited liability company.

Unattractive to Investors

A limited liability company is more suitable for small businesses. However, it does not work well for businesses looking for external financing consistently.

For example, venture capitalists and angel investors invest in a corporation rather than sole proprietorships and LLCs.

Not Suitable for Companies Planning Public Listings

If you own a fast-growing business and want a public listing in the future, a limited liability company structure may not be suitable for you.

Publicly listed companies require a corporation structure with strict compliance and governing structures.

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