Many small businesses and freelancers can benefit from the liability protection and tax advantages that come from forming a Limited Liability Corporation (LLC).
Our guide will explain the benefits of LLCs and what documents you’ll need such as an operating agreement and articles of organization.
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What is a Limited Liability Company (LLC)?
A LLC or Limited Liability Company is a way of structuring a business in a way that protects the personal assets of the business owner. As a LLC, assets such as your home or savings cannot be force-liquidated to pay business debts.
For example, if you own a house cleaning company and a worker causes damage to a client’s home, you would not be forced to use your personal savings to cover the liability.
It is often considered the simplest business structure outside of a sole proprietor business.
Types of LLCs
There are different types of LLCs: the best one for your business will depend on factors like the number of owners.
A LLC with one owner. Unlike a sole proprietorship, a single-member LLC is a separate entity from the business owner, so they gain the legal benefits that come with LLCs. But, like a sole proprietorship, the owner of a single-member LLC is tax subject to self-employment tax.
Professional Limited Liability Company
A professional LLC is mainly set up for people who provide professional services and usually limited to licensed professionals. These include doctors, lawyers, accountants, etc.
A single LLC can divide its assets into series. So, a LLC can put assets, for instance, into separate series. What this means is that separate series are protected against liability from the other series, e.g., if a property contained in one series goes under foreclosure, this judgment won’t impact properties in other series
Low-profit LLC (L3C)
A for-profit social enterprise with the goal of improving society. Here the focus is to create social benefits, not profits.
In an anonymous LLC, information about ownership is not released publicly.
Should I Form an LLC?
As with most business decisions, deciding whether forming an LLC is in your best interests depends on your unique situation. Filing an LLC gives your business its own identity, meaning it can “own” property, have a bank account, and sue or be sued in its own right.
LLC Liability Protection
LLC formation protects your personal assets from business debts in most cases. However, the LLC model does not protect your assets from own negligence related to your business or if you personally sign as a guarantor on a loan.
For example, if you take out a business loan in your own name instead of the business, you may still be personally held liable.
We’ve gathered the most common arguments for, and against, forming a LLC.
Advantages of Starting a LLC
- Limited liability: as discussed above, limited liability is one of the biggest advantages of starting a LLC. Your personal assets are protected from creditors who want to collect on your business’s debts.
- Simple administration: it’s easy to set up and manage a LLC. Though it’s recommended to consult an attorney at some stage in the process, you could handle most of the work on your own.
- Flexible structure: LLCs have a reasonable level of control as to how the entity is managed, e.g., you can choose the number of business owners
- Tax benefits:T LLCs can choose how they want to be taxed, depending on the structure of the LLC e.g,. Single-member LLCs are taxed through the member’s personal tax
Disadvantages of Starting a LLC
- Cost: LLCs might be more expensive than other business structures, e.g., a corporation
- Stringent record-keeping: LLCs must keep detailed records of financial statements and meetings. As the business owner, you need to keep your personal transactions separate from the LLC
Which Business Structure Is Best for Your Small Business?
Not sure if an LLC is right for your business? Here are the other most common business structures and how they stack up against an LLC.
Before we dig into the detail, here’s a quick comparison of the most common business structures.
- Sole proprietorship
- Owners: One
- Liability: Unlimited personal liability
- Taxes: Personal
- Partnerships (General and Limited)
- Owners: Two or more
- General Partnership: Unlimited personal liability
- Limited Partnership: Limited liability for funds contributed
- General Partnership: Self-employed
- Limited Partnership: Personal
- Limited Liability Company (LLC)
- Owners: One or more
- Liability: No personal liability
- Taxes: Self-employed, personal, or corporate
- Owners: One or more
- Liability: No personal liability
- Taxes: Corporate
- Owners: One or more
- Liability: No personal liability
- Taxes: Personal
A sole proprietorship is often considered the simplest business structure. You report business income and losses on your personal income tax. In most states, it costs nothing to set up.
However, a sole proprietorship does not offer any legal protections for your assets. For some, like freelance writers or Etsy shop owners, this structure may work well. It’s a great choice if you want to test a business idea before setting up a formal business.
Both LLC and Sole Proprietorship business pay self-employment taxes.
S Corporation vs. LLC
S corporations (“S corp”) only have to file once a year, offer pass-through taxation, and the opportunity to avoid “double taxation.” (Double taxation refers to income being taxed as corporate income and dividend income.)
They also provide limited liability, like LLCs.
If you are an LLC you can choose to be taxed as an S corp. Attorney Jane Haskins spells out the benefits: “Income generated by an LLC is all taxable as personal income—while you can deduct business expenses from an S corp’s taxable income.” (Source: LegalZoom)
S corps provide business stability because if a shareholder leaves the company, it has no impact on business operations.
Note: there are some conditions under which LLCs cannot be taxed as S corporations. These include if your LLC is not US-based or if you are a nonresident alien.
C Corporation vs. LLC
Where an LLC’s profits and losses pass through the owner in most cases, a C corporation (“C corp”) is generally taxed separately from the owners of the business. LLC and S corps are both pass-through entities, while C corps are flow-through entities.
Many states require at C corps to have at least one director and two officers. In most cases, small businesses will not qualify to be run as a C corp. Usually, it’s a business structure for medium or high-risk businesses. Businesses that eventually want to be acquired typically opt for this structure.
When two or more people want to own a business together, partnerships are one of the easiest business structures.
There are two types of partnerships: general partnerships and limited partnerships
In a General Partnership, two or more partners agree to share in all profits and liabilities generated by the business. When people form a general partnership, they agree to unlimited personal liability for business debts. All members must be actively involved in the business.
A Limited Partnership is a combination of a general partnership and limited partnership. Under this business structure, one or more partners are not involved in day to day running of the business.
Their liability is limited to the funds they have contributed to the business.
Partnerships might an ideal option for people who want to test a business idea or for businesses with several owners.
How Much Does it Cost to Form an LLC?
The cost to file an LLC varies by state but generally ranges between $50 and $500 if you file on your own.
You can also use an online service like Incfile to handle the filing for you. They currently charge $49 plus the state fee.
If you use a lawyer, your attorney fees may range between $200 and $1,000.
IRS Considerations: How Are LLC Members Taxed?
In general, single-member LLCs are taxed as a sole proprietorship. That means you as the owner report profits and losses on an IRS Schedule C form and submit that with your 1040.
Multi-member LLCs are taxed as partnerships.
You may elect to be taxed as an S corp, which means you only pay Social Security and Medicare on your own salary, which is considered a business expense.
Use IRS form 2553 to apply to have your LLC taxed as an S corporation.
What is a Pass-Through Entity?
A pass-through entity refers to the tax structure of an LLC. Essentially, the profits and losses of an LLC “pass-through” the owner and are reported via their personal tax return in the same manner as a sole proprietorship.
What Sort of Documents Do I Need to File an LLC?
Forming an LLC requires registering and filing certain documents required by law. To create an LLC, you can expect to submit the following documents.
Articles of Organization
This is a document filed with the Secretary of State that officially establishes your business.
Typically, it includes:
- The identity of the registered agent
- How the LLC is managed
- The date the LLC is formed
Most Secretaries of State provide a template you can use. You can choose to employ the services of a lawyer to write your Articles of Organization, but it’s not necessary.
LLC Operating Agreement
A LLC operating agreement is a legal document that outlines:
- How your business will operate
- Who the members are
- How the company will make decisions and the voting process
- How profits will be shared
- How new members are added
- In what situations the business may be dissolved.
State Requirements for Operating Agreements Vary
Each state may have different requirements. Research the requirements in the state you plan to form your LLC in. You can do this by visiting the Secretary of State website.
Not every state requires an operating agreement, but experts agree that it’s beneficial to have one.
Naming Your LLC
Many states have a search tool that allows you to check and see if your desired LLC name is available. You’ll need to choose a name that is not already in use in your state.
Do I Have to Include LLC in My Business Name?
Each state has different requirements for whether or not you must include LLC in your business name.
If your official business name does not include LLC, your state may require you to file a DBA.
What is a DBA?
DBA stands for “Doing Business As.” It is a fictitious name for a business. If you are starting an LLC and plan to operate under a name other than that of your LLC, you will need a DBA.
You can create multiple DBAs for your LLC.
How to Start an LLC in 6 Steps
Submitting your own LLC is an easy 6-step process, which most individuals can handle on their own:
It’s not necessary to hire an attorney.
1. Determine Where to Form Your LLC: Your home state is likely the best option unless you do business via a brick-and-mortar located in another state. One of the most popular states to file an LLC in is Delaware, which is known to be business-friendly.
2. Choose Your LLC Name: Check with your Secretary of State to see if your desired LLC name is available. Many will have online tools you can use to check this yourself.
3. Choose A Registered Agent: This is the person who is designated as the recipient of legal documentation on behalf of the business, including tax forms or lawsuit notifications. This person should be over the age of 18 with a physical address where they can receive documents in the state your LLC is filed in. In most cases, you do not want to be your own registered agent.
4. File Formation Documents: These are state-specific forms that create your LLC. They may also be called your Articles of Organization.
5. Create an Operating Agreement: This is a legal document that outlines the members of the LLC, how the business will make decisions, how profits will be shared, how new members are added, and how the company would be dissolved.
6. Get an EIN (Employer Identification Number): This is the number that identifies your business to the IRS. Fill out the EIN form on the IRS website to obtain your EIN.
What’s the Best State to Form My LLC?
There are a few reasons some states appear to be more attractive destinations for setting up your LLC.
Some offer low corporate taxes and sales tax rates; others are more affordable when it comes to creating your LLC.
But the truth is that the best state to form your LLC is your home state. Even with the potential financial benefits that certain states provide, these pros are outweighed by all the hassles that come with setting up a LLC outside of your home state,
So, in most cases, you will file your LLC in the state where you live, however, there may be some situations where you consider registering in an outside state:
- If your business has a storefront or office in your home state, you should file in your home state.
- If your business does most of its business in another state or if you have no actual office (such as a digital marketing firm), you may choose to file your LLC in a more business-friendly state.
However, be aware that if you file in a state other than your home state, you may be required to file a foreign LLC to run a brick and mortar business in your own state. The fees can add up.
Foreign and Domestic LLCs
A foreign LLC is an LLC that was formed in one state but registers to do business in another. A domestic LLC is an LLC that does the majority of its business in the state in which it was filed.
For example, if you form an LLC in Delaware, but run a brick-and-mortar yarn shop in Illinois, you would likely have to register as a foreign LLC, which comes with additional costs and paperwork.
Alternatively, if you filed your LLC in Illinois and ran your yarn shop in Illinois, you would be considered a domestic LLC.
Role of the Secretary of State
In the U.S., 47 of the 50 states have their own Secretary of State, whose responsibilities include registering and authenticating businesses. Typically you will get filing forms from the Secretary of State website and file them through the website.
In Massachusetts, Virginia, and Pennsylvania, this position is called the Secretary of the Commonwealth.
In some cases, the County Clerk or Governor’s website fills this function. Details for each state can be found below in our State-by-State Guide.
State-by-State Guide to Forming an LLC
The fees, requirements, and even required paperwork to file an LLC can vary based on the state you file in. Here are resources for filing an LLC in all 50 states. We’ve added filing fees and issues or rules you might want to be aware of fo reach state.
Alabama: $100 filing fee for a domestic LLC.
Alaska: It generally takes 10 – 15 business days, but it may take longer from April to June and October to December.
Arkansas: Fee is $45 for a domestic LLC
California: Fee is $70, but most businesses must also pay an $800 franchise tax.
Colorado: Filing can be completed online.
Connecticut: Fee is $120 for original filing.
Delaware: Requires a PDF reader to access forms. This is one of the most popular states to file an LLC due to its business benefits.
Florida: E-file makes filing a Florida LLC simple.
Georgia: You will pay $25 to reserve your name, and initial filing fees cost $100.
Idaho: All the forms are easy to find and in one place.
Illinois: Fees were recently reduced from $500 to $150.
Indiana: Well-documented process and easy-to-use website.
Kansas: Fee is just $35. Very easy to file online.
Kentucky: Incredibly easy to navigate. Their Structure Wizard helps you figure out if a LLC is the right choice for you.
Louisiana: Site is easy to use, walks you through step by step.
Maine: Fee is $175 for domestic and $250 for Foreign LLCs.
Maryland: Super simple to file online, most are processed in 7 business days.
Massachusetts: Fee is a whopping $500, with an additional charge for filing online.
Montana: Requires creating a profile to access the documents needed to file.
Nebraska: The filing fee is $100 plus $5 per page for the Certificate of Organization. It can be filed online.
Nevada: The site makes it really easy to file online.
New York: It costs $200 to file.
North Carolina: Fees are $125 for initial filing and an additional annual report filing of $25.
North Dakota: This guide from the SBA breaks down the different structures in ND and how to file them.
Ohio: Use the handy Ohio PDF LLC Guide to simplify the entire process.
Oklahoma: Filing fee of $100, with a 4% fee for filing online.
Oregon: All Oregon LLCs are required to have a registered agent with an Oregon address.
Pennsylvania: The filing fee is $125. They also offer special considerations for Benefit Companies, which are for-profit companies that have a positive impact on society and the environment.
South Carolina: The filing fee for an LLC is $110.
South Dakota: Choose to file online or in person. Foreign LLCs do have to file additional paperwork.
Utah: Filing fee is $70 and business names must include LLC in their name.
Virginia: In Virginia, the filing fee is $100, amendments (for example, to add new members) cost $25 each.
Washington: Filing fee is $200, but can be processed in as little as two business days.
Wisconsin: The fee for electronic Articles of Organization is considerably cheaper than a paper version.
Wyoming: The filing fee is $100 for an LLC, and the state requires a $2 filing fee if you pay with a credit card.
Vermont: There are multiple types of LLCs in Vermont, and Foreign LLCs are required to file a Certificate of Authority
Frequently Asked Questions About LLC
You want to do your due diligence before starting a business. If you’ve still got questions, that is totally understandable! Here are the answers to the most asked questions about LLCs.
How do I establish an LLC for free?
You can follow the six-step process outlined on this page.
How much does an LLC cost yearly?
If you choose to use a third-party service to help form your LLC, you’ll have the option to pay them to handle your yearly paperwork requirements and fees.
Do I need a lawyer to start an LLC?
You can also use an online service that will handle all the paperwork for you. If you choose to use an online service, know that the fees are tax-deductible.
How quickly can I form an LLC?
Note that if you choose to use an online legal service you may want to check on their shipping time frame as well.
Is an LLC a business license?
In addition to forming your LLC, you will need to determine which (if any) business licenses and permits are required for your business to operate legally.
What are the disadvantages of an LLC?
LLCs cater to different business needs, however, this doesn’t mean LLCs are disadvantageous compared to other business structures.
Does an LLC protect you from being sued personally?
You can see the varying degrees of owners’ liability within different small business structures here.
When trying to determine the right type of business structure, you have a lot to consider. Forming an LLC is a simple way to protect your personal assets and giving your business the best chance for success.