What is an LLC?
An LLC, or limited liability company, is a popular type of business structure due to
its flexibility and simplicity.
If you are a small business owner or entrepreneur, starting an LLC is one of the best ways to
establish credibility and protect your assets.
Watch this video to get a quick overview of:
The main features of an LLC How an LLC protects your personal assets
How LLCs are taxed The Importance of an Operating Agreement
And Using a professional LLC formation service
At the end, we will share some free resources to help you start your own LLC and follow
your business dreams.
Millions of new businesses are formed in America every year.
They are legally structured as one of several choices: sole proprietorships, general partnerships,
corporations, or limited liability companies.
The structure chosen for a business will determine who owns the business, how taxes are paid,
and who is liable if a lawsuit or debt arises.
Each state has specific requirements on forming and maintaining a business structure.
For small business owners and entrepreneurs, one of the most beneficial business structures
to choose from is the LLC: the Limited Liability Company.
An LLC has several features that make it desirable.
LLC’s act as a legal entity separate from its owners, creating what is known as a ‘corporate
veil’.
This protection keeps the owner’s personal assets secure in the event of a lawsuit or
unpaid business debt.
LLCs have pass-through taxation.
When a corporation makes a profit, that profit is taxed, distributed to the owners, and then
taxed again as personal income.
An LLC’s profits are not taxed- thus the owners only pay tax on the revenue once.
Business accounting and compliance can be complicated.
LLC’s, relative to other corporate structures, streamline the formation and recordkeeping
burden, making them easy even for single-owner businesses to maintain.
These are the main reasons you might want to start an LLC for your business.
There are many other reasons as well, for instance, privacy, which we will address later;
and the fact that LLC owners do not have to be US citizens or permanent residents.
If you want flexibility and simplicity, LLCs are a great option for starting a new business.
How an LLC protects your personal Assets
If you operate your business as a sole proprietor or partnership, and - for example - someone
gets hurt on your premises, or one of your products injures someone, you can be sued
as an individual and lose your personal assets: your home, your car, etc.
An LLC protects the business owner by acting as a separate legal entity, responsible for
its own debts and lawsuits.
The distinction between owners and business structure is known as the corporate veil.
It is not enough to simply establish an LLC, you’ll need to preserve the corporate veil by:
Signing documents as a representative of the company and not as an individual.
Keeping personal and business finances separate.
Following an operating agreement.
Avoiding fraudulent activities.
And keeping up to date with annual filings.
You can learn more about the corporate veil at our website, and research common forms
of business insurance.
You can never completely prevent problems, but to prepare for the worst and protect yourself
and your business, forming an LLC is a good first step.
How LLCs are Taxed
Taxes are one of the most complicated parts of owning a business, and the penalties are
stiff if you fail to comply with the law.
LLCs are quite flexible in how you choose to be taxed, which can be used to your benefit.
While the details are too much to cover in this video, the most important things to know
about LLC taxes are:
If you are a single-member LLC, the IRS ignores the business structure and taxes you like
it would an individual.
The LLC’s income is reported on your personal tax return at the end of the year.
If you have a multi-member LLC, the LLC does not pay any income taxes, and all profits
are passed through to the members, who then pay the IRS on their individual tax return.
While these are the default tax elections, you can also opt for your LLC to be taxed
as a corporation: a C corp or an S Corp.
Regardless of your tax designation, you will need to file yearly with the IRS.
Check out our Federal Tax Guide, or consult with an accountant for specific details on
what forms you’ll need to file.
As for state taxes, because LLCs are typically “pass-through” entities, individual members
pay state taxes; not the LLC itself.
However, there are certain types of taxes LLCs may have to pay.
Common forms of state tax you may have to pay include: franchise tax, sales tax, withholding
tax, and Unemployment Insurance tax.
Again, you’ll want to consult an accountant for details.
The Importance of an Operating Agreement
When forming an LLC, the most essential document is the operating agreement.
An operating agreement is an internal document, meaning it does not need to be filed with
the state.
However, it is a critical component of your LLC that outlines the essential ownership
and member details of the organization.
The operating agreement is the foundation of your LLC, a living document that gives
your business credibility and helps maintain your corporate veil.
It will outline the management and voting rules, capital contributions and distributions,
membership and dissolution practices, and all of the basic stipulations on how the company
is operated.
We provide Operating Agreement templates at our site, and we also rate and recommend professional
LLC services that can help you create a custom Operating Agreement.
These professional corporate agents are secondary companies for hire that can help you form
and maintain your LLC, which we will address next.
Using a professional LLC formation service
LLCs are formed at the state level, and typically cost between 50 and 150 dollars for basic
formation.
To officially form an LLC, you’ll file paperwork with your state’s Secretary of State, and
once that has processed, you will register for an EIN, or Employer Identification Number,
with the IRS.
Your EIN is like a social security number for your company, and is necessary for taxes
and banking.
You can do all of this on your own to save money, or you can hire a professional service
for an additional 50 to 150 dollars.
Various providers have different packages, but one service to consider is hiring a Registered
Agent.
When you file your formation documents with the state, they will ask for a registered
agent, which is like a point of contact to receive mail and official papers.
An LLCs registered agent can be a member of the LLC, or it can be a hired service.
A hired registered agent is a great convenience: they will help with getting your reports filed
on time, will keep your business mail separate, and will be available at all regular business
hours to accept official mail and legal papers on your LLC’s behalf.
A final and important additional benefit of using a service is privacy: a professional
service will provide a level of privacy by withholding your personal name and home address
from the LLC’s contact information.
There are many reasons you might not want your personal information easily accessible
and associated with your business- hiring a professional LLC formation service is an
easy way to accomplish this.
Hopefully this video has helped you understand the basics of an LLC and how it can protect
you and your assets.
We have covered some of the required documents and fees, and ways you can hire professional
help and maintain some personal privacy.
Visit our site HowtoStartanLLC.com to explore these concepts in more detail, and find specific
requirements for your state.
Not only do we gather all of the essential information in one place, we also offer other
free legal forms and resources for entrepreneurs, and discounts with our affiliate service providers.
Check out the links in the description below, and please give us a like and subscribe if
you appreciate our content.
We are dedicated to providing the most useful information for small business owners, and
would love to see your feedback in the comments on what other information you need to help
follow your entrepreneurial dreams.