What is an LLC?

An LLC is a business entity that provides its owners with flexible tax and management options. It also offers business owners protection from personal liability, meaning their personal assets are generally not at risk if the business incurs debts or legal issues. It's a popular choice especially for smaller businesses.

Key features of an LLC

• Limited liability: Owners (called members) are generally not personally responsible for the company's debts or legal obligations. This means personal assets like homes and cars are usually protected if the business faces lawsuits or owes money.
• Flexible management: LLCs can be managed by the members themselves or by appointed managers. This allows for adaptability in how the business is run.
• Tax options: By default, an LLC's profits and losses pass through to the members' personal tax returns, avoiding double taxation. However, members can choose for the LLC to be taxed as a corporation if it benefits them.

How does an LLC work?

An LLC operates as a legal entity separate from its owners. Here's a simple breakdown of how it functions:

1. Formation: To create an LLC, you must file a document called the "Articles of Organization" (also called Articles of Incorporation, Certificate of Organization, etc.) with your state's business filing agency, often the Secretary of State. This document includes basic information like the LLC's name, address, and the name of the  registered agent.
2. Operating Agreement: Although not always required, it's advisable for the members and the LLC to enter into an Operating Agreement. This document outlines the LLC's management structure, member roles, and operating procedures and it is not filed with the state.
3. Management: An LLC can be managed in two ways: member-managed or manager-managed. In a member-managed LLC, all owners (members) actively run the business and make decisions. This is common for small businesses. In a manager-managed LLC, members appoint one or more managers (who can be members or outside hires) to handle daily operations, while the owners take on a more passive role. Choosing the right management structure depends on how involved the members want to be in running the business.
4. Taxation: An LLC is usually treated as a pass-through entity for tax purposes. This means the business itself doesn't pay federal income taxes – instead, profits and losses are reported on the members' personal tax returns. However, LLCs can choose to be taxed as a C-Corp if they prefer or as an S-Corp if they qualify.

Pros and Cons of an LLC

Is an LLC right for you?

An LLC often works well for businesses with a small, cohesive group of owners—like family members—who want liability protection and flexibility, and don’t depend on having a lot of members to be able to raise capital. However, it's important to consider your specific business needs and to consult with a legal professional to determine the best structure for your situation. Here are a few things to keep in mind:

• State regulations: LLC laws vary by state, so it's important to understand your state's specific requirements.
• Initial and ongoing costs: There are filing fees to start an LLC and potential annual fees or reports required by the state.
• Self-employment taxes: In some cases, members may need to pay self-employment taxes on their share of the profits. These are taxes to pay for Social Security and Medicare which are typically withheld from an employer's wages by an employer.

An LLC is a structure that provides protection against liability and business debts that works well for many small to medium sized businesses. It offers the benefits of limited liability, tax flexibility, as well as simplified management and compliance, making it an attractive option for those looking to start a new business. If you’re considering starting one, launch it with the pros.
 

Additional resources

Learning how to enforce a contract is just one step. Explore these additional topics to learn more and take the next steps.

• How to Start an LLC
• How are LLCs Taxed
• LLC Formation by State