LLC

A Limited Liability Company (LLC) is a common business structures in the US for its simplicity and flexibility. Its primary value is to shield the owners (i.e. member(s)) from personal liability for any liability from the company's operations and obligations. This means that, generally, the personal assets of the members are protected if the business incurs debts or faces lawsuits. A LLC is a legal entity incorporated at the state level, but is considered a disregarded entity for income tax purposes.

• Limited Liability Protects personal assets from business liabilities.
• Easy to Set-Up Requires less paperwork and fewer formalities compared to corporations.
• Recognized Legal Entity Provides legitimacy and can enhance credibility with customers and investors.
• Flexible Tax Treatment Allows for pass-through taxation, avoiding double taxation. However, with the flexibility to elect to be treated as a corporation.
• Flexible Management Offers options for member-managed or manager-managed structures.
• Profit Distribution Flexibility Members can decide how profits are distributed.
• Perpetual Existence It must be actively dissolved or will remain in existence, even if there are any changes in ownership

How LLCs Protect Business Owners

An LLC's primary advantage is its protection against personal liability. In a sole proprietorship or partnership, owners can be held personally responsible for business debts. This means creditors can go after your personal assets like your home, car, and savings account. An LLC separates your personal assets from those of the business. If the LLC runs into issues legally or financially, only the business assets are at risk.

Note that the legal structure does have limitations on how much it can protect its owners. Always consult with an attorney and tax accountant for any specific case.

How to Set Up an LLC

Aside from a sole proprietorship, LLCs are some of the most straightforward business structures to set up. How LLCs are set up depends on the state, but generally follows the steps below:

1. Choose a Business Name Ensure the LLC's name complies with state regulations and is not already in use.
2. File Articles of Organization Submit these legal documents to the state's LLC filing office, usually the Secretary of State. During this process, be sure to also select a registered agent to receive notices on behalf of the LLC. There may also be a filing fee with the state in order to form the LLC.
3. Create an Operating Agreement, if needed. Although only sometimes required, this document outlines the management structure and operating guidelines. For single-member LLCs, this may not be needed.
4. Obtain an EIN, if needed. If an LLC will have to pay taxes or will have employees, then the LLC will need to get an EIN with the IRS. Note that An LLC can exist since it's formed at the state level without an EIN, which is issued at the federal level by the IRS. In some cases, an LLC does not need an EIN which is outlined here by the IRS.
5. Stay Compliant Obtain any necessary business licenses and permits. Refer to the appropriate state's business information to learn more. Some states have no requirements for business licenses but may require annual reports. Some states may require a business privilege tax or a general business license.

If the LLC is being formed in a state but members are not physically operating out of, then the LLC may need to also form a foreign LLC where members are based or where business may take place.

Recommended Services

One of the main reasons that forming LLCs have become much simpler is because of the plethora of online services that help with LLC formation at affordable prices. Several online services can simplify the LLC formation process as well as assist with ongoing compliance.

• LegalZoom
• IncFile
• Northwest Registered Agent
• ZenBusiness
• Inc Authority

Business owners who are not as tech savvy can also turn to local law firms in their region to help with the set up. The costs may be higher than online services, but can offer alternative to business owners who prefer in-person interactions.

How to keep an LLC in good standing

After setting up your LLC, it's essential to maintain its good standing. Here are some key steps to take:

• File Annual Reports Most states require LLCs to file annual reports in order to stay in good standing. Missing the filing deadlines can cause the LLC to fall out of good standing with the state. This can affect the business' ability to operate such as obtaining bank accounts or business loans. Some states require a centennial or bi-annual filing instead of annual report.
• Know What Taxes to Pay and Pay on Time Just like individuals, LLCs are subject to many different types of taxes from local business taxes, state franchise taxes, sales tax, and/or income taxes, to name the main ones. Be prepared to know what taxes and when to pay for them. Consult with a tax accountant for specific situations.
• Set Up Separate Bookkeeping for the LLC In order to keep the limited liability protection, the company's cash flow operations should be completely separated from any personal transactions. This is best done by setting up a separate business bank account, credit cards, payment accounts (such as PayPal), and proper record keeping.
• Update Operating Agreement When Needed As the business grows or changes, update the operating agreement accordingly.

From time to time, it's important to check if the LLC remains in good standing by requesting a report from the state, usually with the Secretary of State.

Manager-Managed vs. Member-Managed

LLCs can be structured in various ways, but there are two primary management structures:

• Manager-Managed: Members appoint one or more managers to handle the day-to-day operations of the LLC.
• Member-Managed: All members actively participate in the business's management decisions.

Single Member vs. Multi-Member

• Single Member: A single-member structure typically involves one individual who is solely responsible for the operations and decision-making within the entity.
• Multi-Member: A multi-member structure includes multiple individuals who share responsibilities, collaborate on decision-making, and contribute to the overall management of the entity.

Types of LLCs

Series LLC

A Series LLC allows a single LLC to have multiple "series" or subdivisions, each with its own assets, liabilities, and members. This structure is beneficial for businesses with diverse operations or investments. One common industry that utilizes Series LLC is real estate for owners of multiple real estate properties.

PLLC

A Professional Limited Liability Company (PLLC) is a specific type of LLC meant for licensed professionals like doctors, lawyers, and accountants. It provides the same liability protections as an LLC while allowing licensed professionals to offer their services.

L3Cs

Low-Profit Limited Liability Companies (L3Cs) are hybrid structures designed for organizations with primarily charitable or educational purposes. They allow investors to contribute funds while receiving a limited return.

Not all states offer all of these variations of LLCs. Therefore, it's important to check with the specific state where the LLC is or will be formed. Typically the information is available with the Secretary of State. Consult with the local attorney if the information is unclear.

Alternatives to LLCs

While LLCs provide significant benefits, they might not be the best choice for every business. Here are some alternatives:

• Sole Proprietorship is the default business structure that a business owner operates under when they start their business without setting up a formal legal entity. This business structure provides no legal protection or tax benefits for its owner, but is the simplest to operate under.
• Partnership is by definition when two or more individuals agree to do business together. It is easy to establish but, similar to the Sole Proprietorship, does not offer personal liability protection.
• Corporation Provides strong liability protection but is more complex and expensive to maintain.
• S Corporation Offers pass-through taxation like an LLC but with limitations on corporate structure and restrictions on ownership.