What is an LLC?

LLC stands for Limited Liability Company. Many business owners are drawn to forming an LLC because of that business entity’s most attractive feature: An LLC provides protection for the personal assets of owners and members.

Is a Limited Liability Company the right choice for your business? Let’s explore the business structure – its pros and cons – so you can decide.

What is an LLC, and How does it Work?

what is an llc

With the limited liability company structure, there can be one owner, two owners (a partnership), or many members. Similarly, what is an LLC operating agreement?

There are choices in the management structure. All the members can have a role in management by having voting rights. The voting rights can be “weighted” or have more clout according to the percentage of ownership the member has in the company.

Memberships in an Limited Liability Company are transferable. Members share in profit and losses; if it’s a partnership, the partners share in profit and losses.

The owners can choose whether or not to be taxed as a partnership or an S Corp, whichever will be more beneficial.

All these types of decisions are spelled out in two key documents: articles of organization and operating agreement. The articles of organization name who is who, and what their roles are. The operating agreement details the business structure, steps for transferring memberships, and how the Limited Liability Company will be managed.

Should I Start an LLC?

what is an llc

There are two main reasons for forming a limited liability company:

1. To protect the owners or members personal assets from liability if the business fails and

2. To realize tax advantages.

For more information read reasons to start an LLC and what type of businesses should be one, for example, small business LLC.

What are the Benefits of having an LLC?

what is an llc

There are many benefits to forming a limited liability company, which also begs the question what can you do with an LLC? That doesn’t mean an LLC is the best choice for every business. There can be as many cons to match the pros – see Pros and Cons of an LLC.

Here is a list of the benefits:

Limited Liability Protection: Personal assets of owners and members protected.

Taxation Choices: Tax impacts can be passed through to owners or members as income on an individual’s tax return (pass-through taxation), or the Limited Liability Company can be taxed as a C Corp or S Corp.

Transferability of Membership: This can be quite simple as spelled out in the operating agreement.


Management Flexibility: The Limited Liability Company can have one manager who is a member of the LLC, or the Limited Liability Company can hire a manager who is not a member. The Limited Liability Company can be run by a committee.

Profit and Loss Pass-through: The Limited Liability Company profit and loss can be passed through to individual members (pass-through taxation), and adjusted to reflect the percentage of ownership.

Members can have voting rights.

Silent Memberships: When the Limited Liability Company is formed, the members don’t have to be listed on the documents.

Taxation: Forming a Limited Liability Company can be a way to avoid double taxation. If a business is a corporation, the business itself may be taxed, and the owners may also be taxed on profits.

What are the Downsides to a Limited Liability Company?

One of the main downsides of forming an Limited Liability Company is that the annual renewal fees can be high. The fees vary by state. Also, there are publication requirements – also vary by state – which must be met for the Limited Liability Company to remain in operation.

To learn more read the Pros and Cons of an LLC.

There are additional downsides.

It may be difficult to raise capital when the Limited Liability Company is being formed.

Although it’s easy to transfer memberships, it can be difficult to transfer ownership.

Profits are taxed immediately. There’s not an option to instead reinvest profits, as you can with a corporation.

Some states restrict certain types of businesses from forming an Limited Liability Company.

Where Should I Form a Limited Liability Company?

You form a Limited Liability Company with your secretary of state. The filing fee may vary from $40 to $500 depending on where you live. Filing requirements may vary according to state law.

Before you file, you’ll need to name your Limited Liability Company, and also write your articles of organization and operating agreement.

What are the Different Types of LLCs?

There are many different types.

  • Single Member LLC: This is like a sole proprietorship with benefits. The sole proprietorship doesn’t protect its owner from liability, but the single-member Limited Liability Company does.
  • Member Managed LLC: profits and losses go to members (pass-through taxation), and members run the company. The LLC is a type of multi-member LLCs.
  • Family Limited Partnership LLC: The Limited Liability Company is owned by family members as in multi-member LLCs.
  • Professional LLC: The Limited Liability Company is managed by a manager.
  • Restricted LLC: This type of Limited Liability Company only exists in Nevada. The LLC cannot distribute profits until it’s been in operation for 10 years.
  • L3C Company: The Limited Liability Company is for-profit but with the philanthropic distribution of profits.
  • Anonymous LLC: This type of Limited Liability Company only exists in New Mexico. The ownership details are not on any documents.
  • Non-Profit LLC: The Limited Liability Company is a nonprofit with 501c3 status.
  • Series LLC: The series Limited Liability Company is available in 8 states. A series LLC is organized by internal segments, such as members, managers, assets, and interests. Profits are shared by members.
  • General Partnership LLC – The Limited Liability Company is a multiple-member LLC.
  • Limited Partnership LLC – There are at least two members, one is a general partner and one is a limited partner. Usually, the limited partner is a silent partner.

Types of Limited Liability Company Summary

Type of LLCDescription
Single Member LLCSole proprietorship with liability protection.
Member Managed LLCMulti-member; profits/losses go to members; members run the company.
Family Limited Partnership LLCOwned by family members.
Professional LLCManaged by a manager.
Restricted LLCOnly in Nevada; Can't distribute profits for 10 years.
L3C CompanyFor-profit with philanthropic distribution of profits.
Anonymous LLCOnly in New Mexico; Ownership details not documented.
Non-Profit LLCNonprofit with 501c3 status.
Series LLCAvailable in 8 states; Organized by internal segments.
General Partnership LLCMulti-member LLC.
Limited Partnership LLCAt least two members; one general partne

What Type of Business Entity Could I Form Instead of an LLC?

You can form a partnership for a business that isn’t an LLC, or you could form a corporation – a c corporation or an s corporation. Here’s a look at how each type of business entity is different from a Limited Liability Company, and from each other. In each, the ownership structure is different.

Partnership: As with an Limited Liability Company, you can have a general, limited or limited liability partnership. With a limited partnership, the partners report to a general partner. In a general partnership, all owners are equally responsible for debts and profits. The limited liability partnership protects personal assets. So why do an Limited Liability Company instead? The paperwork is easier.

S Corporations: The S Corporation issues stock and owners are shareholders. An S corporation also provides liability protection for owners. S Corporation owners are taxed based on the number of shares they own. The S Corporation owners must report earnings on their personal income tax returns.

If you are asking should I elect S Corp status for my LLC, it is always an option as your business continues to grow.

C Corporations: The C Corporation is an incorporated business that is taxed separately from its owners, who are also taxed. The C-Corporation also provides liability protection for owners. Employees of C Corporations have stock options and benefits. Business owners may choose limited liability companies for tax purposes instead of C Corporations to avoid double taxation of their company.

How to Form a Limited Liability Company (LLC)

Limited Liability Companies must be filed with the secretary of state where the companies are formed.

You’ll need to have developed your articles of organization, which include the names of all members and management, your company name and address, and the name and address of your registered agent.

You’ll need to have also developed your operating agreement, which establishes the rules and bylaws of the company. The operating agreement also includes the details of the company management and the business plan for company operations.

what is an llc

For more information on these topics go to How do you Create an LLC.

After you’ve formed and done the filing for your LLC business entity, you’ll have some additional steps to take: Check out 10 Things You Need To Do After Forming An LLC.

Roles and Responsibilities in an LLC

Just like corporations, Limited Liability Companyies can also define roles and responsibilities for their members. While not mandatory, it’s a good practice, especially as the LLC grows:

  • Operating Agreement: It’s crucial for an Limited Liability Company to draft an operating agreement. This document outlines the operational procedures of the business and the roles and responsibilities of each member. It can be seen as the rulebook of the company.
  • Decision-making Process: In a Limited Liability Company, decisions can be made collectively or might require unanimous approval, depending on the operating agreement. Important decisions, like bringing in a new member or taking on significant debt, should have clear voting processes.
  • Duties and Responsibilities: Each member may have specific duties and responsibilities, such as managing financials, overseeing marketing, or handling day-to-day operations. It’s crucial to clarify these roles to avoid overlaps or gaps.

Management and Business Structure of an LLC

Corporations have structured management and business structures. For example, there are meetings of boards of directors of corporations, and the content of the corporation meetings must be noted in writing and recorded.

Limited Liability Company structures are generally not as strict as they are with corporations. That’s because the owners or members who establish the LLC set the guidelines for the Limited Liability Company companies. That’s not to say that an Limited Liability Company can’t have a board of directors, similar to a corporation setup.

There are two main types of LLC business structures. With either structure, the members can decide to have a board of directors. Members will have voting rights based on their amount of capital investment in the company.

Member managed

Typically this type of LLC structure has a small number of members. Usually, each member has the experience and wants an active role. This is a good choice for small businesses.

Manager managed

In this LLC structure, one person is chosen as manager. The person chosen as a manager can be a member or non-member. Members can replace the manager and that is typically done by vote.

Limited Liability Company Taxation and Financial Management

Navigating the complexities of LLC taxation and financial management is essential for ensuring the financial health and sustainability of your business. Here are key points to consider:

  • Flexible Taxation: Unlike corporations, LLCs benefit from pass-through taxation, allowing profits and losses to be reported on members’ personal tax returns. However, an LLC can choose corporate taxation if it offers financial advantages.
  • Financial Management Essentials:
    • Meticulous Bookkeeping: Keep detailed records of all business transactions.
    • Separation of Finances: Ensure a clear distinction between personal and business finances to maintain the integrity of your LLC’s financial management.
    • Tax Planning: Engage in proactive tax planning, including making estimated tax payments quarterly and understanding state-specific tax obligations.
    • Expense Deductions: Maximize tax deductions by accurately tracking and deducting eligible business expenses.
  • Professional Advice: Consulting with financial advisors or accountants familiar with LLC structures can offer strategies for asset protection, profit maximization, and efficient tax planning.

Succession Planning and Future Proofing Your Limited Liability Company

Ensuring the longevity and legacy of your LLC involves thoughtful succession planning and strategies to adapt to future challenges. Here’s how to approach it:

  • Succession Planning:
    • Operating Agreement Provisions: Include clear protocols in the operating agreement for the transfer of membership interests and decision-making in the event of a member’s departure.
    • Leadership Development: Identify and develop potential future leaders within the organization to ensure a smooth transition.
  • Future-Proofing Strategies:
    • Technological Investment: Stay ahead by investing in technology that improves efficiency, diversifies product offerings, and enhances customer engagement.
    • Organizational Culture: Foster a culture that values innovation, flexibility, and continuous learning to empower your team to navigate future challenges.
    • Legal Safeguards: Regularly review your operating agreement, compliance practices, and insurance coverage to protect against future legal challenges.
    • Market Trends and Regulatory Changes: Keep abreast of technological advancements, regulatory changes, and market trends that could impact your business.

How Much Does it Cost to Form an LLC?

Depending on the cost from state to state, the cost to file can vary from $40 to $500. Limited Liability Companies are filed with the secretary of state.

You’ll incur additional costs of course if you elect to hire a lawyer and/or accountant. You may need an accountant to advise you of the tax implications of the various types of LLCs and corporations setups.

How are LLCs taxed?

what is an llc

All Limited Liability Companies provide asset protection and all are taxed. The tax classification depends on the structure of the LLCs:

If there is only one member the LLCs are taxed as a sole proprietorship. In tax lingo, the single-member LLCs are called “disregarded entities” and profits and losses are reported on Schedule C of tax returns.

If there are two members, the LLCs are taxed as partnerships.

Multi-member Limited Liability Companies are taxed as partnerships. The members must report LLC profits and losses using two forms, 1065 for overall figures and Schedule K-1 for individual figures.

A C-Corporation is taxed as a business. C-corporation owners also report income on personal taxes. Company debts and profits must be reported. This is double taxation.

For an S corporation, owners are shareholders. The owners report their share of the income on Schedule K-1.

Should I Change my Sole Proprietorship to an LLC?

The main reason to join the ranks of limited liability companies would be to protect personal assets.

If you are a sole proprietor, you may be able to enjoy a low-income tax rate. However, you are also liable for business debts. If you have business debts as a sole proprietor, creditors may be able to go after your personal property.

Want more in-depth information? Go to How to Change Your Sole Proprietorship to LLC: 6 Easy Steps.

How do LLC owners get paid?

LLC owners get paid by their share of the profit. The owners or members are paid via a distribution that passes from the LLCs to them. They must report the income from LLCs on their personal income tax return that they file.

If the Limited Liability Company is an S corp, the company issues stocks and the owners are taxed based on the shares that they own.

If the Limited Liability Company is a C Corp, the owners are taxed based on their earnings with the company.

What is a registered agent?

A registered agent is a person appointed by the leaders of the Limited Liability Company. The registered agent accepts legal documents on behalf of the business. To fulfill that role, the person must be available during business hours.

The registered agent must be filed with the state when the Limited Liability Company information is filed. The person must be registered in the state as a registered agent, and be a resident of the state.

What is an LLC operating agreement?

The LLCs operating agreement spells out the roles of the owners, manager, and members. The agreements also include the bylaws of the Limited Liability Companies, and management and operations details of the LLCs.

How do you prepare an operating agreement? For more info, go to Does Your LLC Need an Operating Agreement?. To learn more about what should be included, check if amending an LLC operating agreement is the right step for you.

Do I need a lawyer to form an LLC?

That depends on how complicated your Limited Liability Company is. Is it a single owner? You can probably walk yourself through it.

If you’re going to have a complicated operating agreement or a multi-member LLC, it may be best to retain a lawyer. Some of the paperwork – especially the annual refiling and reporting – can be daunting and it must be completed in a timely manner. Miss a deadline? You’ll have to file all over again.

And why shouldn’t business owners be free to concentrate on building the business? You can put all your legal matters into the hands of an attorney who’s well-versed in limited liability companies. There are lawyers who specialize in this LLC limited liability field.

Your lawyer may also be able to give you guidance as to which type of Limited Liability Company is best for your business.

Should I form a partnership or an LLC?

Both a partnership and an LLC business provide limited liability protection.

A general partnership as a business operates under the names of the owners, as a joint venture. The owners share in profit and loss – and owners are personally liable for business debts.

What does an LLC protect your business from?

An Limited Liability Company protects you from:

  1. Seizure of your personal assets. In other words, if your LLC business fails, creditors can’t put a lien on your house, or personal bank account or possessions.
  2. Double taxation. You’ll pay income tax on any profits the LLC makes (or on your share of the profits). You’ll report that income or loss on your personal income tax on Schedule C.
  3. Being named as involved in a business as an LLC member. LLCs don’t have to list the names of all their members on documents filed for the business.

Do I need an EIN number for an LLC?

Yes, if you’re a single-member LLC. In other words, if you’ve turned a sole proprietorship into a single-member LLC.

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Lisa Price Lisa Price is a staff writer for Small Business Trends and has been a member of the team for 4 years. She has a B.A. in English with a minor in journalism from Shippensburg State College (Pennsylvania). She is also a freelance writer and previously worked as a newspaper circulation district manager and radio station commercial writer. In 2019, Lisa received the (Pennsylvania) Keystone Award.