If you’re thinking about starting a business, you may have heard that you should form an LLC. But what is an LLC? And what are the advantages of an LLC? In this comprehensive LLC for beginners guide, we’ll cover everything you need to know about this business entity, including forming an LLC in your state, what a registered agent is, what an operating agreement is, and more.
We’ll also introduce you to the concept of a registered agent and explain what an operating agreement is. By the end of this guide, you’ll understand LLCs and how they can benefit your business.
- What is an LLC?
- Single-member vs. multiple-member LLCs
- The Advantages of an LLC
- The Disadvantages of an LLC
- How to form an LLC in your state
- Naming your LLC
- What is a registered agent?
- Differences Between Member-managed vs. Manager-managed LLCs
- Formation Documents (Articles of Organization)
- What is an Operating Agreement?
- How is an LLC taxed?
- What’s an EIN?
Whether you’re thinking about starting a new business or are curious about LLCs, this guide is for you. With our in-depth look at LLCs and everything you need to know about them, you’ll have the information you need to decide whether an LLC is right for your business. So let’s get started and explore everything you need to know about LLCs!
What is an LLC?
An LLC, or limited liability company, is a business structure that provides its owners with limited liability protection. This means that if the LLC is sued, the owners are not personally liable for the debts and liabilities of the business. Instead, only the assets of the business are at risk.
Example: John and his business partner started an LLC for their Landscaping Company called Green Bear LLC in Florida and hired a few employees.
One of their employees was delivering a landscaping project to a customer’s house and damaged the customer’s property while doing so.
The customer decides to sue John and Green Bear LLC. In this case, only the assets of Green Bear LLC are at risk, not John’s personal assets like his house or car.
This regulation is one of the main advantages of an LLC- it protects your personal assets from being at risk in the event of a lawsuit against your business.
An LLC is one of the most popular business structures available today and is well suited to many industries and enterprises. Whether you’re starting a small local business or launching a high-growth startup, an LLC can help to give your venture the added security and flexibility it needs to succeed.
Single-member vs. multiple-member LLCs
A single-member LLC is owned by one person, while a multiple-member LLC is owned by two or more people. Both types of LLCs have the same limited liability protection, but there are some differences when choosing between a single-member and multiple-member LLC.
A single-member LLC is owned and controlled by one person. Yet, it provides the same legal protection from liability as a multiple-member LLC. This alternative can be an excellent option for those who are starting a business on their own, as it offers the flexibility to make all the decisions about how to run the business without consulting with anyone else.
A multiple-member LLC is owned by two or more individuals and may be structured in various ways, including as a partnership, corporation, or other business entity. Multiple-member LLCs have the flexibility to adopt different structures within the company. They can choose whether to have formal partnership agreements, LLC operating agreements, or other legal structures that govern how the business is managed.
Whether you’re thinking of starting a single-member or multiple-member LLC for your business, both are excellent options that offer their unique benefits. With proper planning and careful consideration, you can choose the LLC structure that will be best for your business.
The Advantages of an LLC
Personal Liability Protection
As we just discussed, one of the critical benefits of an LLC is that it offers its owners limited liability protection. If your business is sued for any reason, your personal assets are protected from seizure. This can be a huge advantage in situations where you may be personally liable for losses or damages incurred by your business.
Simple to Start and Maintain
LLCs are relatively simple and inexpensive to form and maintain compared to other business structures. In most states, all you need to do is file the necessary paperwork and pay the required filing fee. Once your LLC is up and running, there are only a few ongoing maintenance requirements, such as keeping accurate financial records.
LLC Tax Flexibility
One advantage of an LLC is that it offers its owners flexibility in how they are taxed. Depending on your business structure, you may be able to choose between being taxed as a sole proprietor, partnership, S-corporation, or C-corporation. This can be a significant advantage if you’re looking for ways to minimize your tax liability.
Another benefit of an LLC is that it offers its owners flexibility in managing their business. Depending on the structure of your LLC, you may be able to choose between being managed by all the members of your business or having management controlled by a few key managers. This can be especially useful if you are looking for ways to minimize the time commitment involved in managing your business.
The Disadvantages of an LLC
No Ease of Transferability
One notable disadvantage of an LLC is that it can be difficult to transfer ownership. This can be a problem if you are looking to sell your business or bring on new partners. Unlike other business structures, all members of an LLC must agree to any changes in ownership.
Not the most cost-effective option
One potential disadvantage of forming an LLC is the cost. In most states, there is a filing fee to form an LLC. Additionally, LLCs are required to file annual reports in most states, which can also add to the cost of operating an LLC. There are cheaper options for business structures, such as sole proprietorships and partnerships.
How to form an LLC in your state
There are three ways to form an LLC in your state: using an LLC formation service, hiring a lawyer, or doing it yourself. The key difference between these options is the level of assistance you receive in the process and the cost.
Using an LLC formation Service
💰 Price range: $xx-xxx + state filing fee
The easiest way to form an LLC is to use an LLC formation service. These services will handle all the paperwork and filing for you and, in some cases, can even help you get set up with a registered agent. The downside of using an LLC formation service is that it can be slightly more expensive than DIY. We’ve reviewed the best LLC formation services to help you decide if this is the right option.
Hiring a Lawyer
💰 Price range: $xxx-xxxx + state filing fee
If you have the budget, another option for forming an LLC is to hire a lawyer. This can be a good option if you have complex business needs or are not comfortable handling the paperwork and filing yourself. The downside of hiring a lawyer is that it can be pretty expensive. Check Avvo.com to find a lawyer in your area who specializes in forming LLCs.
Enter your State or City in the location field, and click on “Business” to see relevant lawyers around you.
💰 Price range: state filing fee only
The most affordable way to form an LLC is to do it yourself. This can be a good option if you have relatively simple business needs and are comfortable handling the paperwork and filing requirements on your own. You can find instructions for creating an LLC in all 50 states below.
Naming your LLC
It is important to choose a unique name for your LLC. If your desired name is similar to an existing LLC, you will have to make sure that the other LLC does not object to you using it as part of your own name. You should also investigate whether your state allows you to use the name you want (depending on the state in which you are operating, it might be too generic) and whether your proposed name may infringe on any trademarks.
You should also check the availability of your name on the Internet (e.g., at www.internic.net) and in any relevant databases, such as telephone directories or trade directories (e.g., Dun & Bradstreet) before you decide to start an LLC with that name. In addition, make sure that there is no similar name used by a government agency or by another business that would conflict with, or infringe on, your proposed name.
When choosing a domain name, make sure it is not already being used. It’s important to consider all options because the name you choose will be part of your company branding and have a huge impact on future success. Go to Namecheap and check if your chosen name is available to register as a domain.
A lot of people wonder if they should trademark their business name before forming an LLC. Check this article to learn more about trademark vs. LLC.
What is a registered agent?
A registered agent, also known as a resident agent, statutory agent, or registered office is an individual or business entity designated to serve as the official point of contact for your LLC.
A registered agent is responsible for receiving legal and tax documents on behalf of your LLC and forwarding them to you, so it’s essential to choose someone available to receive these documents on time.
Many businesses offer registered agent services, so you can easily find one that fits your needs and budget. Some popular options include ZenBusiness, IncFile, and IncAuthority. You can read our reviews (IncAuthority Review, ZenBusiness Review) to get a better idea of what they offer.
Registered Agent Requirements
To serve as a registered agent for an LLC, the individual or business entity must:
- Be available during regular business hours to receive legal and tax documents
- Have a physical address in the state where the LLC is formed
- Be authorized to accept service of process on behalf of the LLC
The rules may vary depending on the state, so check with your local regulations for specific requirements.
Can I be my own registered agent?
Yes, you can be your own registered agent for your LLC. However, this comes with a few responsibilities, such as being available during regular business hours to receive legal and tax documents, having a physical address in the state where the LLC is formed, and being authorized to accept service of process on behalf of the LLC.
Differences Between Member-Managed vs. Manager-Managed LLCs
One of the decisions you’ll need to make when forming an LLC is whether it will be member-managed or manager-managed.
Member-managed: In a member-managed LLC, all members have equal decision-making authority and are actively involved in the business’s day-to-day operations.
Manager-managed: In a manager-managed LLC, on the other hand, some members may not be directly involved in the business’s day-to-day operations. Instead, one or more members will have the authority to make decisions on behalf of the company and are typically referred to as “managers.”
While both member-managed and manager-managed LLCs have their advantages, choosing a structure that makes sense for your business is essential.
For example, if you are forming an LLC with family members or close friends, a member-managed LLC may be the best option as it allows everyone to have an equal say in how the business is run.
On the other hand, if you are forming an LLC with investors or business partners who will not be actively involved in the company’s day-to-day operations, a manager-managed LLC may be a better choice. This option will ensure that business decisions are made by the most qualified and best suited for the role.
Formation Documents (Articles of Organization)
Depending on the state where you choose to start your LLC, formation documents may be called Articles of Organization, Certificate of Formation, or Certificate of Organization.
Regardless of the name, these documents provide essential information about your LLC, such as:
- Name and address of the LLC
- The registered agent for the LLC
- Purpose of the LLC
- Members or managers of the LLC
In most states, Articles of Organization must be filed with a local business filing office. Most of them also require an initial filing fee.
Here is a free Articles of Organization template from Northwest Registered Agents.
What is an Operating Agreement?
An operating agreement is a legal document that lays out the rules and guidelines for how your LLC will operate. It typically includes important information such as:
- The purpose of the LLC
- How ownership and profits are divided among members
- Who has decision-making authority within the LLC
- How LLC members should resolve conflicts or disputes
Depending on your LLC’s specific needs, there may be other provisions that you include in your operating agreement.
An operating agreement is not required by law, but it is strongly recommended for any LLC. If you are forming an LLC without an operating agreement, your state’s default rules and regulations will apply. While this may seem like the most straightforward option, having an operating agreement in place can help ensure that your business runs smoothly and avoids common legal pitfalls down the road.
Download this free LLC Operating Agreement template by Northwest Registered Agent to get started.
How is an LLC taxed?
LLCs are typically taxed as pass-through entities, which means that their profits and losses “pass-through” to the members of the LLC for tax purposes.
For example, if your LLC earns $100,000 in profit during a given year, you will report this income on your personal income tax return. You may also be able to deduct certain business expenses from that income, depending on the type of expenses and your tax bracket.
It’s important to note that LLCs can also elect to be taxed as corporations, but this is typically only done if the LLC has multiple members and wants to avoid paying taxes at the individual level.
If you are unsure how your LLC will be taxed, it’s good to speak with an accountant or tax advisor. They will be able to help you understand the tax implications of your LLC and make sure that you are correctly reporting your income and expenses.
What’s an EIN?
An EIN, or Employer Identification Number, is a unique number the IRS assigns to all businesses. It is used in place of your personal Social Security Number and helps track business activity for tax purposes.
If you are forming an LLC, it’s recommended that you apply for an EIN soon after incorporating, as you will need it for many business-related transactions, such as opening a business bank account and filing taxes.
Visit the IRS website and complete the online application to apply for an EIN. It’s typically swift and easy to do, although you may need to provide additional information or documents if your LLC has multiple members or owners.
There you go! Now you know the basics of forming an LLC.
While it may seem like a lot of work, taking the time to form your LLC properly will pay off in the long run by protecting your personal assets and giving your business the legal foundation it needs to grow and thrive.
Frequently Asked Questions
What is an LLC?
A Limited Liability Company is a company with the legal principle of limited liability which protects its owners from debts and obligations.
The LLC, or sometimes referred to as a ‘Limited’, was designed because of this need for protection. Its lengthier name, ‘Limited Liability Company’, was derived in order to distinguish it from S Corporations which require a slightly different set of rules.
The LLC is one of the most widely used business forms in the United States. This type of company structure was made possible after changes to state laws that took place between the 1970s and 1990s.
What is the downside to an LLC?
LLC’s have so many benefits, but the two main cons are:
1. LLCs are subject to Double Taxation which means that income and profits are taxed twice; once at the company level and then again at a personal level when distributed to owners.
2. Due to their pass-through tax status, LLCs may not receive as much tax reduction as corporations. This can make them more costly for small businesses and new companies who are looking at their balance sheets.
What state do I form my LLC in?
The first step when choosing an LLC is deciding on a location. You need to determine where you’re going to be doing business and which state’s laws will apply to your LLC.
If a company gets registered in the wrong state, it could be subject to back taxes and penalties.
One good way of deciding is by thinking about where you’ll be doing business. If you’re going to operate mainly online then it doesn’t really matter which state’s laws apply; just pick one that has an affordable fee structure.
Who should form an LLC?
If you are planning on starting a small business, an LLC can be useful. Here’s why:
If your business is profitable and has the potential to grow, it may make sense to form an LLC. An LLC limits your liability exposure in case anything goes wrong with your company. It shields you from personal bankruptcy if things go south. You’ll also have the legal protection of an LLC, which means that your personal assets will be protected and won’t be at risk in case of a lawsuit. An LLC is a good idea if you want to raise funds from investors or partners. Investors like the structure and protection of an LLC. When they invest in your business through a partnership, they are putting their own assets at risk. If your business is sued or fails, they can lose money. An LLC protects them from this risk since personal assets are shielded from company liabilities and debts.