What Is an LLC and How Does It Work?

An LLC offers great advantages to a budding business. From personal protection, flexible pass-through profit distribution and so much more!

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what is an llc and how does it work

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Updated on: March 21, 2024
Read time: 3 min

Here's a quick introduction to the LLC to prepare you for exploring further aspects of LLCs, including their formation, operation, taxation, and how they contrast with other types of business entities.

What is an LLC?

A limited liability company is a type of business entity that is authorized by state law. A relatively recent creation, the LLC was designed to have some of the benefits of a corporation, but with less formality.

One of the main benefits of both a corporation and an LLC is that all of the owners have limited personal liability for the debts of the business.

The owner's personal assets (home, car, personal bank accounts, etc.) generally are not subject to attachment to pay business debts, including for lawsuits against the business. This limitation of liability is not available to sole proprietors or general partners in a partnership.

State laws typically require corporations to hold annual shareholder meetings, keep minutes of those meetings, and file various types of reports. At one time, many states would only allow the creation of a corporation if there were at least three owners, although most, if not all, states now allow single-owner corporations.

The LLC was devised to avoid many of the requirements of a corporation, while offering limited liability protection for the owners.

LLC formation

Each state has its own laws governing limited liability companies, but generally, an LLC is formed by filing some type of document with the state agency regulating business entities, very often the Secretary of State. The form, frequently called the Articles of Organization or Certificate of Formation, provides basic information about the LLC.

Many LLCs also create an operating agreement form, setting forth details about the business, such as the initial contribution of each member, which is another name for "owner" in an LLC, the percentage of profits and losses to be allocated to each member, and the voting rights of each member. Unlike corporations, LLCs do not have shares of stock.

LLC structure and operation

There are two ways in which the structure of an LLC is classified:

  • Ownership structure. An owner of an LLC is called a "member." This is similar to a shareholder in a corporation. If there is only one member, it is known as a single-member LLC. If there are two or more members, it is known as a multi-member LLC.
  • Management structure. The day-to-day operation of the business is controlled by "managers" of the LLC. Managers are similar to the officers of a corporation. Members of an LLC may also serve as managers, in which case it is called a member-managed LLC. This is more common in single-member, and small multi-member, LLCs. If members of an LLC hire non-members as managers, it is called manager-managed, which is more common in larger, multi-member LLCs.

The LLC members make major decisions, whereas the managers conduct the day-to-day operations. Property is owned in the name of the LLC. If you decided to open a franchised business, the franchise would be in the name of the LLC. In most states, an LLC is not required to hold annual meetings of the members, or to keep minutes of meetings.

LLCs and taxes

An LLC has a choice as to how it will be taxed. Unless certain forms are filed with the Internal Revenue Service (IRS), a single-member LLC will be taxed as a sole proprietorship, and an LLC with two or more members will be taxed as a partnership. Both single-member and multi-member LLCs can choose to be taxed as a corporation by filing the appropriate form with the IRS. A choice can also be made to be taxed as either a C corporation or an S corporation.

The series LLC

A few states have created what is called a "series LLC." This allows the creation of one LLC, which is divided into two or more subdivisions or “series." Each series has its own limitation of liability, members, and managers.

For example, if you own several rental properties, you could form one LLC, but put each property in a separate series. Or, if you owned several franchised restaurants, each location could be a separate series. However, the law varies significantly from state to state, and the series LLC is currently only available in Alabama, Delaware, Illinois, Indiana, Iowa, Kansas, Minnesota, Missouri, Montana, Nevada, North Dakota, Oklahoma, Tennessee, Texas, Utah, Wisconsin, and the District of Columbia.

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This article is for informational purposes. This content is not legal advice, it is the expression of the author and has not been evaluated by LegalZoom for accuracy or changes in the law.

99 days ago
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Great service

From the beginning the experience has been great. Super easy set up of my LLC, i have the concierge package and they are amazing, Teresa Scherbing is awesome. She is always there to answer any questions i may have.

Stanley Bolanos
71 days ago
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Was very easy to use and I got my LLC…

Was very easy to use and I got my LLC the same day. I was SHOCKED. I know every state is different but it was like a miracle. Thank you LZoom!

Erica Walters
72 days ago
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My experience has been excellent from…

My experience has been excellent from the first day opening my LLC, and continues to be great now that my business is thriving. All of my important documents are organized and secured on their sight. Which is amazing when getting loans and doing my taxes. They also provide great customer service every time I call with questions. Would highly recommend using LegalZoom. Plan to start another business and will be using them again. Thank you LegalZoom!

George Wells
71 days ago
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I find that LegalZoom has all the…

I find that LegalZoom has all the answers if you're starting a business an LLC and incorporation or you're doing a trust or a Will. These are the people you want to trust don't go to an expensive attorney you're just throwing your money away. Legal soon gets five stars!

Sean Christopher
71 days ago
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Representative was highly skilled

Representative was highly skilled, knowledgeable, and promptly took appropriate actions to assure that my LLC is in total compliance with New York State regs. Excellent service!

Edward Jordon
79 days ago
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Just efficient and easy

Just efficient and easy. Made my filing of an LLC simple and stress free

Stefanie ONeill
78 days ago
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Great service

Great service! Thank you to Monica for helping me establish my new LLC

ZS
78 days ago
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Five Stars For LegalZoom

LegalZoom offers a streamlined and accessible platform for creating an LLC, simplifying complex legal procedures for entrepreneurs. Their user-friendly interface and comprehensive guidance ensure that even individuals without legal expertise can confidently establish their businesses. Overall, LegalZoom enhances efficiency and provides valuable support in the LLC formation process.

CLC
78 days ago
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Being new to this process of starting…

Being new to this process of starting an LLC, LegalZoom has been there to walk me through it. Making the process easy and leaving me with a good feeling of confidence. Their business hours are very good and they're open on Saturday too

Eric Geyer
83 days ago
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Alifer was so helpful in setting up my…

Alifer was so helpful in setting up my LLC and refunding me my cost from my DBA that was processing!!

Morgan Keats
84 days ago
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Considering this was my fist time…

Considering this was my fist time filing an LLC, the site was very user friendly and made the process very streamlined. Will def refer to others!

Kat H
87 days ago
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Legal zoom helped me set up an LLC with…

Legal zoom helped me set up an LLC with ease and great customer service

Lori Willinski
101 days ago
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I could've never completed my LLC…

I could've never completed my LLC without the help from legal zoom. They made it so easy.

Christie H.
100 days ago
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Very helpful and professional

Very helpful and professional. Knowledgeable of all the LLC requirements and compliance guidelines.

Klaeton Orsted
Rated4.6out of 5 based on23,946+ reviewson

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