What is an LLC

Lets Learn about What an LLC is and How to Get one Started!
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Denise E
Denise E
Senior Financial Editor & Contributor
Last Updated: April 19, 2021
Date Published: February 24, 2021

A limited liability company is a popular and safe option for most small business owners.

An LLC (limited liability corporation) is a business structure designed to protect business owners from being personally liable for the company’s debts or other liabilities.

It provides a flexible business structure and is fairly simple to set up.

So What is an LLC and why business owners choose a limited liability company:

  • The business owner is not liable for the company’s debts and can choose their own management structure.
  • They qualify for pass-through taxation – meaning that profits are only taxed once.

Before forming your business, you will need to decide on a business structure: LLC (limited liability company), C Corporation, S Corporation, Nonprofit, Sole Proprietorship, General Partnership, Domestic LLC, Foreign LLC, Multi Member LLC, Single Member LLC, manager managed llc, etc.

Each business structure has its own advantages and features but for the majority of small businesses, an LLC is going to be the best choice.

what is an LLC

What is an LLC?

LLC’s are simple, flexible and protect your personal assets. Furthermore, LLC’s can be owned by more than one person known as LLC “members”.

If the business doesn’t do as well as planned or you have a rough year, you as the business owner are personally protected under an LLC.

For example, if your Limited Liability Company declares bankruptcy or is sued, your personal assets such as your vehicle, personal bank accounts, and house are safe.

This protects your personal liability and you are provided limited liability protection.

A Single member LLC is a pass-through entity, which means that profits and losses from the LLC are “passed through” to you and taxed as personal income.

This benefits you because you are not required to pay both corporate and personal taxes on your earnings.

For tax purposes, there are huge benefits for an llc owner.

Multi-member LLC’s are taxed as partnerships and are also pass-through entities.

This means each llc member pays personal income taxes on their portion of the profit.

Benefits of an LLC

  • No llc member limit – an llc can be setup as a single member llc or multi member llc.
  • Personal asset protection – as mentioned above, your personal assets are protected should your LLC go bankrupt or be sued.
  • Pass-through taxation benefits like a general partnership or limited liability partnership
  • Simple to set up and maintain – no annual meetings, formal officers, or complicated records.
  • Flexible – LLC’s have very little restrictions regarding the company’s structure. You decide if you want your business to be a single member LLC, multi-member LLC, and so on.
  • LLC’s are a widely recognized business structure and bring credibility to your organization.
  • Access to financing – Once your LLC is formed, you can start to build a credit history which opens the door to business loans and financing to grow your business.
  • Flexible profit sharing – LLC’s can choose how they want to do their profit sharing, they are not required to be equally distributed among members.

Cost of Forming an LLC

You will be happy to hear that the up-front costs of starting an LLC aren’t exorbitant, but depending on your state, they can range anywhere from $50 – several hundred dollars.

Each state has their own LLC formation Fee, even if you go the DIY route and file your own documents directly with the IRS, you still have to pay the state fee.

The most affordable option is to figure out the formation process on your own and just pay the state fee.

However, missing a step or doing something incorrectly could end up costing much more.

So if the DIY route doesn’t sound like the route you want to take, you may want to hire an LLC formation service or lawyer to guide you through the process.

LLC formation services offer really affordable llc formation packages – you can read more on that here!

Not only will they form your business entity, but they offer help with your operating agreement, as well as other services like leal advice and more.

To find out more about the cost of forming an LLC, read our in-depth article here that breaks down the cost by state.

Using an LLC Formation Service

If you have a little bit of flexibility in your budget or you know that the DIY route is not for you, then we strongly recommend hiring an LLC Formation Service.

An LLC formation service will make sure everything gets filed properly and expediently and they will make sure that all of your annual maintenance deadlines are not missed.

LLC formation services specialize in just that, forming businesses so that as a small business owner, you don’t have to worry about it.

They streamline the process for you and are there to answer questions, fix mistakes, and help with legal advice and needs.

Many of them even take care of your yearly maintenance and filings for you and offer registered agent service as well.

Here are three popular LLC formation service options to give you an idea of what they offer:

ZenBusiness

Price: $39 + State Fee filing fee

ZenBusiness is one of the most affordable options and a great value.

They are a little smaller and newer than the other two mentioned below, but have excellent customer reviews and overall features.

Northwest Registered Agent

Price: $225 – State Fee filing fee

Northwest Registered Agent also included a year of registered agent service with any LLC formation package. They also offer premium customer support that is unmatched to their competitors.

If you anticipate questions or more complex LLC formation, they are the top choice. You definitely get what you pay for and more with Northwest.

Northwest is our best overall value option.

Incfile

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Price: $0 + State Fee

IncFile will form your LLC for free and include a full year of registered agent service with any LLC formation package.

IncFile is at the top of our list of the best LLC formation services, year after year.

How do I know which Business Structure to Choose?

As your business grows and changes, you can change the business structure, but an LLC is a great place to start.

The decision should be made based on which type of business structure provides the best set of advantages for your unique business circumstances and goals.

If you aren’t sure what to choose, you can always consult a lawyer or accountant to help guide your decision.

Conclusion

As you can see, there is a reason why an LLC is such a popular choice for business owners and entrepreneurs.

It is flexible, has tax benefits, and provides protection to you as an individual should your business face financial or legal hardships.

For an in depth guide and step by step process on how to start your LLC, checkout our post here.

 

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  1. IRS.gov "Limited Liability Company (LLC)" Page 1 . April 7, 2021

  2. SBA.gov "Business Structures - Limited Liability" Page 1 . April 7, 2021

  3. SBA.org "Choose a business structure" Page 1 . April 7, 2021