What Does It Mean to Be an LLC?

What exactly does LLC mean?

An LLC, or limited liability company, is a type of business entity that a company can form by filing paperwork with the state. An LLC can have one owner (known as a "member") or many owners.

The words "limited liability" refer to the fact that LLC members cannot be held personally responsible for business debts. In a dispute with a business creditor, members may lose the money invested in the company but their personal assets aren't at risk.

LLC members also aren't usually liable for a co-owner's negligence or wrongdoing in business matters. Corporations also offer this liability protection, but sole proprietorships and partnerships do not.

An LLC is governed by a written operating agreement that describes the way the business will be run, the roles of the members, and the way profits will be shared. But LLCs are very flexible in the specifics of the agreement. In contrast, corporations have a rigid structure of officers, directors, and shareholders.

What does LLC mean in a company's daily business?

Being an LLC means you'll need to draw a firm line between your business life and your personal one. Mingling business and personal finances—or being unclear about whether you're acting in a business or personal capacity—could cause you to lose your liability protection in a dispute. Here are some actions to take:

• Set up a business bank account and never mix business and personal funds
• Always sign business documents as an officer or member of the business
• Include the letters "LLC" after your business name on correspondence, invoices, business cards, and other documents

Forming an LLC may also mean changing the way you pay your members and handle taxes. Your LLC can be taxed in the same way as a sole proprietorship or partnership, with self-employed owners paying their own quarterly income and self-employment taxes.

But some LLCs save money by electing S corporation taxation. In an S corp., members can be company employees, with the company running payroll and withholding taxes for them. A business accountant can explain more and advise you on the best tax status for your business.

State law may require you to keep certain LLC records, and you may have to file an annual LLC report and pay an annual fee. Staying on top of reporting deadlines will ensure your LLC remains in good standing with the state.

Limited liability company advantages and disadvantages

Many small business owners are unsure whether to form a business entity at all—rather than remaining a sole proprietorship or partnership—or whether an LLC or a corporation is best.

Advantages of a limited liability company over a partnership or sole proprietorship include:

• Liability protection. As long as you keep your business and personal matters separate.
• Structure. An LLC operating agreement provides a roadmap that can help avoid expensive disagreements among members.
• Potential tax savings. By electing S corporation taxation.
• Protection of your business name within your state. States don't allow two business entities to form with the same name.

Corporations can have these same advantages, but they have a less flexible operating structure and are usually subject to more reporting requirements than LLCs.

Compared to a sole proprietorship or partnership, the main disadvantage of a limited liability company is the expense and paperwork of setting up the business and filing annual reports. There are also potential administrative hassles in keeping a separate bank account and running payroll. If you plan to solicit outside investment, you may find that investors prefer corporations over LLCs.

How to start an LLC

You can start an LLC in just a few simple steps. First, you'll need to choose a business name and select a person to serve as the registered agent to receive official documents on behalf of your business. Then, you file LLC formation paperwork with your state and pay a filing fee.

Your LLC should also have an operating agreement. You can find a sample LLC operating agreement online to get started, but for a document that fits your business perfectly and follows state laws, consider working with a lawyer or using a reliable, professional service. This way, you'll get an agreement that protects and clarifies everything for all members.

Understanding what LLC means in business will help you decide whether an LLC is right for your company. If you're unsure, a business lawyer can answer your questions and get your company started on the right foot.