What Does It Mean to Be an LLC?
What Does It Mean to Be an LLC?
An LLC is a way of organizing your business. It's similar to a corporation but typically more flexible and with fewer requirements. When you form an LLC, your business becomes its own legal entity that's separate from you personally. This can be helpful if your business is ever sued.
“LLC" is short for “limited liability company." While corporations have been around for many years, LLCs are a newer type of business entity that has proved popular with small business owners. All states have laws allowing LLC formation, but some states place restrictions on LLCs, for example, prohibiting certain types of professionals from forming an LLC.
The “limited liability" of an LLC refers to the owners' protection from personal liability for business obligations. If your business is an LLC, the money you have put into the business might be lost in a lawsuit against the business, but your business creditors cannot touch your personal bank account or property.
If you don't formally create a business entity in your state, you'll be a sole proprietorship, if you are the only owner, and a general partnership if you own your business with other people. There are several advantages to setting up an LLC instead. These include:
- Liability protection. Limited liability is a feature of LLCs, corporations, and many other types of formal business entities, but not sole proprietorships and general partnerships. When you don't form a business entity, there is no legal separation between you and your business, and all your personal assets are potentially at risk in a lawsuit involving the company, your business partners, or your employees.
- Structure. LLCs are usually governed by an operating agreement (or if there is none, by state law) spelling out the way the business will be managed, how profits and losses will be divided, how the business will deal with a new or departing owner, and how the business will be wrapped up if things don't work out. An operating agreement acts as a roadmap that makes life far easier in times of stress and conflict.
- Legitimacy. An LLC makes your business seem more legitimate, and it can be difficult to secure any financing if you haven't set up a formal business entity.
Forming an LLC can have benefits over a traditional corporation:
- LLCs are more flexible. Corporations have a uniform structure, with shareholders, directors, officers, and shares of stock. This makes them appealing to outside investors, but many small businesses don't need or want this kind of formality. An LLC company can be run by the owners or by managers, there are no required job titles, profits and investment can be divided however you choose, and an LLC can choose a pass-through tax structure or traditional corporate taxation.
- In many states, LLCs have fewer requirements. Although the rules vary, LLCs generally do not have to keep as many records as corporations, and they are less likely to have to file an annual report and pay an annual fee.
Creating an LLC
To set up an LLC, you'll file articles of organization with the state agency in charge of business filings—usually the Secretary of State. You should also prepare an operating agreement and keep it with your other important business records.
Once your LLC has been officially formed, you will receive a certificate from the state. You can use this to get a federal tax ID number and open a business bank account. To maintain your liability protection, it is important to keep your records up to date with the state and always keep your business and personal finances separate.
What does it mean to be an LLC? It means you have taken an important step in the life of your business—one that protects you and prepares you for the future.