LLCs are types of businesses with unique structures, benefits, and advantages. This guide will break down what an LLC is and how to form one for your own business.
What is an LLC?
In a nutshell, an LLC or limited liability company is a type of business structure that separates business owners from their companies. More specifically, it protects business owners so they aren't personally liable for any business debts or liabilities.
Compared to other types of business structures, LLCs are considered hybrid entities that combine many of the same protections and characteristics of corporations with some of the attributes of sole proprietorships or partnerships.
Reasons to Form an LLC
Business owners may decide to form an LLC for multiple reasons and benefits. Here are just a few!
As mentioned, the primary reason for forming a limited liability company is in the name: it limits liability for business owners and other executives. This means that, if the company in question goes under and acquires a lot of debt, only some (or none) of that debt will actually be transferred to company owners.
This protects company owners or entrepreneurs from going bankrupt every time a business idea fails (and this happens frequently). LLCs usually establish that debt and other types of liability can only affect owners at set amounts.
If an LLC is formed anonymously, business owners will also enjoy a degree of privacy that they wouldn't otherwise. This can sometimes be helpful if a previous business idea didn't work out so well and the business owner wants to start fresh without the reputational baggage of prior failures.
Flexible Tax Management
LLCs are also much more flexible in terms of tax management. This means that business owners can sometimes enjoy better tax breaks or tax rates if they form an LLC compared to running a business with some other structure or format.
Lastly, there's an element of professionalism gained if a company becomes an LLC as opposed to keeping their business with a smaller, simpler structure. LLCs are seen as more professional or legitimate and may gain access to more negotiation or bargaining power when meeting with investors, taking on debt, and more.
In other words, forming an LLC gives a business a larger amount of soft power that it can use to develop in the future.
How to Form an LLC
Individuals can form LLCs in any US state. However, there are multiple factors to consider when forming an LLC so you get the best deal.
Choose a Location
When you decide to form an LLC, you have to file paperwork with your home state or the state in which you plan to do business. If your business operates in multiple states, you'll be able to choose which one you want to register your company with.
Most entrepreneurs decide to form LLCs in their home states or in Wyoming, New Mexico, Delaware, and Nevada. That's because these states provide special benefits, like a 0% corporate tax rate (in the case of Wyoming, for example) or other perks that can make running their company more profitable or easier on their part.
Articles of Organization/Formation
Lastly, you'll need to prepare Articles of Organization. This is a document that you do file with your state that officially marks the formation of your LLC. State requirements for these documents can vary but often include:
- the name of your LLC
- the name and address for your registered agent
- explanations of how the LLC will be managed
- the reason for the LLC's formation (i.e. to better suit your business goals)
- how long the LLC will operate, if there's a time limit
In most states, both the person forming the LLC and the registered agent must sign the Articles of Organization. The Articles should then be submitted to your state's business filing agency. Depending on the state, some Articles can be filed online while others may need to be submitted in person.
You'll also need an LLC Operating Agreement, which is a document that describes how the limited liability company will be run. This includes information such as:
- how profits and losses will be divided among members
- what different LLC members will contribute
- how the business will be managed
- how you admit new members or deal with leaving members
- and more
Keep in mind that your LLC's Operating Agreement won't be filed with your state as with the rest of the documents above. Instead, you'll keep the Operating Agreement with your records and other important business documents.
The naming requirements for an LLC will vary by state. In general, however, naming requirements include:
- Uniqueness. Your LLC's name can't be the same as another business entity registered in the same state
- Certain words may be restricted. For example, you may not be allowed to use the word "bank" in your business name
- You'll usually be required to add either LLC or limited liability company at the end to indicate your business's new status
Be sure to look at the individual naming requirements for your state before filing.
Choose a Name
You'll also need to pick a name for your LLC, and this includes several naming requirements. Think carefully about the name you want your LLC to be filed under, as this is what will be on all official and legal paperwork and can also play a role in how people recognize your brand or business.
If you choose an excellent name but you aren't quite ready to form your LLC, the majority of states will let you reserve that name for a certain period of time if you pay a fee and file the correct form.
Choose a Registered Agent
Anyone forming an LLC must also choose a registered or statutory agent. This is the agent that receives lawsuits and any official or legal documents on your LLC's behalf.
As with naming requirements, every state has different registered agent requirements. In general, these include:
- The agent must be 18 years of age or older OR a business entity that provides these services
- At least one of the agent's addresses must be in your LLC's state
For the most part, the majority of LLCs use an employee or a member of the organization to act as their registered agent. Otherwise, they may hire a registered agent company to provide one for them.
Who Should Start an LLC?
Ultimately, an LLC is a great idea for any business owner that wants to distance themselves (and their bank accounts/credit scores) from the risks inherent in any entrepreneurial startup. It's also a good idea for business owners looking to grow their companies and take on new members, open new locations, and necessarily take on more debt.
However, it's not a good idea to open an LLC just because, or if your business isn't particularly profitable.