What Is An LLC?
An LLC is a structure for setting up a business, also known as a limited liability company. LLCs give business owners a structure for separating their business assets and liabilities from their personal assets and liabilities.
But members of LLCs only enjoy protection from claims on their personal assets such as their bank accounts, investment accounts, retirement, and real estate to the extent that the LLC is operated as an independent entity separate from personal accounts.
LLCs are chartered by the Secretaries of State of the 50 states, as well as Puerto Rico, Guam, American Samoa, and the District of Columbia. Each charter establishes protection and responsibilities for the members of the LLC in that state, but LLCs can operate in other states after registering as “foreign” LLCs.
LLCs offer many of the benefits of incorporation, but under simpler rules and at a much lower cost.
Table of Contents
- What Is An LLC?
- What are the pros and cons of an LLC?
- At what point do I need an LLC?
- Where is the best state to form an LLC?
- What does it cost to form an LLC?
- What do I need to start an LLC?
- What does an LLC protect?
- What is the difference between LLC and Inc?
- What is the difference between DBA and LLC?
- What is the difference between an LLC and an S-corp?
- What is a Series LLC?
- What is a single-member LLC?
- What is a member of an LLC?
- What is a registered agent for an LLC?
- What is a statutory agent for an LLC? What is a resident agent for an LLC?
- What are the bylaws for an LLC?
- What is an operating agreement for an LLC?
- What tax form does an LLC file?
- What is an LLC partnership? Is it the same as an LLP?
- What is an annual report for an LLC?
- What is the due date for LLC tax returns?
- If I file personal bankruptcy, what happens to my LLC?
- What is the difference between a holding company LLC and an operating company LLC?
- What is a member-managed LLC?
- What is a manager-managed LLC?
- What is an executor of an LLC?
- Who is an authorized member of an LLC?
- Who is an authorized representative of an LLC?
- What do you call the owner of an LLC?
- What happens to assets when an LLC is dissolved?
- What are the tax advantages of an LLC?
- What is Asset Acceptance LLC?
- What do I need to open a bank account for my LLC?
What are the pros and cons of an LLC?
There is no easier way to separate and protect personal assets than forming an LLC. This includes bank accounts, investments, retirement, and vacation real estate. LLCs are simple to organize. They require no stated capital, just your state’s filing fees. And LLCs can enjoy almost all the tax breaks afforded to small businesses of all kinds under recent changes in the law.
On the other hand, it is possible to go wrong with an LLC by not paying attention to details. Commingling LLC bank accounts and personal spending can invalidate asset protection. Failure to file an annual report (not all states require them) can cause you to lose your certificate of formation.
Signing a contract with your legal name and without referring to your LLC can cause you to lose legal protection of your personal assets.
At what point do I need an LLC?
Protection from liability is always better sooner than later. Before your first business transaction, before you file for your EIN or open a bank account, you should have filed your Articles of Formation for your LLC and received a letter of formation from your state’s Secretary of State. You can’t protect your personal assets retroactively. The best time to organize your LLC is now.
Where is the best state to form an LLC?
In general, the best state for forming your LLC is the state where you live and operate your business.
What does it cost to form an LLC?
Different states charge different fees for forming and maintaining LLCs. It only costs $50 to form an LLC in New Mexico, and there are no annual fees to keep it. California charges a $70 fee for filing your LLC and $20 to file an information report. They also impose an $800 franchise tax the first year, and every year your LLC is in operation.
Every state will require you to maintain a registered agent. Registered agent service for your first year may be included in the fees of a company you use to help you form your LLC. These fees can run from $49 to $800.
After your first year, a registered agent will cost $50-$500 yearly unless you can be your own registered agent. This means being available at reasonable business hours every business day to receive mail and court documents. Accounting fees can range from $500 to $2000 per year, depending on the number and complexity of your tax returns.
It’s not unusual for the new members of an LLC to spend $2500 just forming their business. But forming an LLC can save tens of thousands of dollars in federal income taxes every year. It can save your bank accounts, investment accounts, retirement accounts, and real estate should your business fail, or you ever lose a lawsuit — or even if you win a lawsuit but have to pay huge legal fees.
What do I need to start an LLC?
Once you have a business idea, a business plan, and a good idea of where you will find capital for your venture, the next step in forming an LLC is choosing a name for your company. The same offices where you file your LLC paperwork will usually have databases of available names you can use for your company.
Any name you choose must be followed by the terms “LLC,” “L.L.C.,” “Limited Liability Company,” or other variations of the term that the state you’re in finds acceptable.
Next, you will need to file your Articles of Organization with your Secretary of State and pay the required fees. When your state forms your LLC, you will need an Operating Agreement (even if you are the only owner of your LLC). You will also need to apply for your employer identification number (EIN) with the IRS, open bank accounts, get any required business licenses, and file any needed surety bonds.
If you are planning to run your business under any name other than the name of your LLC, you will need to file a fictitious name (DBA) with your county or city.
What does an LLC protect?
An LLC protects the assets of its owner that are not part of the business. If a company goes bankrupt or loses a court case with a large judgment, the last thing business owners want to do is to cash out their 401(k)s and SEP-IRAs, clean out their bank accounts, and sell their other investments and even their homes. Creating a limited liability company protects against this possibility.
However, LLC owners who do not follow specific rules may be subject to treatment as personally liable. Common mistakes with enormous liability consequences include:
- Signing a personal guarantee to get a loan.
- Offering your own property as collateral for a loan.
- Signing a contract in your own name rather than signing it as an officer of your LLC. You must sign contracts in the name of your LLC to get personal protection against court judgments.
- Using credit cards or home equity loans to fund your business.
- Fraud, misrepresentation, or sloppy record-keeping.
What is the difference between LLC and Inc?
These are abbreviations for two different types of businesses. An LLC is a Limited Liability Company, and Inc. stands for “incorporated.”
There are differences in the vocabulary used to describe LLCs and corporations. An LLC is “organized” by its members. A corporation is “incorporated” or “chartered” by the state in which it is organized. The activities of an LLC should be governed by its Operating Agreement. (Some LLC owners fail to create this document.
It is extremely useful in the operation of the business but not required by the state.) The activities of a corporation are governed by its bylaws, which are required by the state. Owners of an LLC are called “members,” while owners of a corporation are called “shareholders.”
An LLC protects the personal assets of its owners, provided there is no commingling of funds, and the owners observe other formalities of operation. LLCs cannot raise money by selling shares of stock, but they avoid double taxation by “passing through” revenues and expenses.
Corporations protect the personal assets of their shareholders. Corporations can raise money by selling stock.
LLCs that elect tax treatment as if they were a C corporation or an S corporation are still LLCs. Only tax treatment changes.
What is the difference between DBA and LLC?
DBA is short for “doing business as.” A DBA is a fictitious name under which a company is operating. In most situations, any name other than the owner’s legal name is a fictitious name that requires DBA registration.
For instance, Olive Oyl could operate a hamburger shop under the fictitious name Olive Oyl’s Hamburger Shop. To use this name, she would have to file a DBA. If she put up a sign that just read “Olive Oyl,” she would not need a DBA.
An LLC is a limited liability company. No owner(s) of an LLC ever sign business documents under their legal names. Failure to use the “LLC” in their business name or when signing business documents would invalidate the legal protection afforded by forming an LLC.
However, LLCs usually “do business as” a fictitious name. Once the LLC has received the approval of its Articles of Formation from the state, it can file for its fictitious name or make a “DBA filing” with the county where the business will operate.
What is the difference between an LLC and an S-corp?
Since the beginning of 2018, LLCs have been able to elect to be taxed as if they were Subchapter S corporations. For federal tax purposes, there may be very few or no differences at all if the member or members of an LLC do not file an election with the IRS. Income and expenses from the business pass through to the individual tax return of the owners.
If the members of the LLC elect to be taxed under either Subchapter C or Subchapter S of the Internal Revenue Code, then the LLC can get a variety of corporate tax breaks.
This doesn’t mean that every S corp is an LLC. The individual state’s charter “corporations.” They don’t charter “S corps” and “C corps.” Corporations, like LLCs, can elect to be treated under the different subchapters of the Internal Revenue Code if they meet certain requirements.
IRS requirements for treating a corporation under Subchapter S are having fewer than 100 owners and one class of stock.
For differences between LLCs and corporations in general, please see “What is the difference between LLC and Inc?” above.
What is a Series LLC?
A series limited liability company, also known as a series LLC or SLLC, is a unique method of organizing a business so that claims on one part of owner holdings will not jeopardize other parts of owner holdings. With a series LLC, there is no need to set up separate LLCs to protect assets.
Each series acts as a separate LLC. It has its own name, bank accounts, management, and accounting records. The members of the LLC, its owners, have ownership in each individual series, but they may have different rights in each series.
Each series can own real and personal property. It can sue and be sued. But it is not necessary to set up a new LLC or corporation to protect each series.
Most states do not permit the formation of series LLCs. Delaware was the first state authorize series LLCs, followed by Illinois, Iowa, Nevada, Oklahoma, Tennessee, Texas, Utah, and Puerto Rico. Some other states, such as California, do not allow the formation of series LLCs in their own state but permit out-of-state or “foreign” series LLCs to operate with appropriate registration.
In most states, articles of formation for LLCs must include a statement that authorizes it to form a series LLC. Then the LLC must form an operating agreement for the master LLC, and for each of the subsidiaries, it will create in the series. The business only has to file articles for formation once and can amend its operating agreement to create new series business entities as the business expands.
What is a single-member LLC?
One way to think of a single-member LLC is as a single-owner business with liability protection. Also known an SMLLC, a single-member LLC qualifies for recent tax breaks for small business owners such as the new 20 percent deduction for self-employment income, but also shields the owner’s personal assets, such as house, car, and retirement accounts, from court judgments against the business.
It is no longer true that all the income and expenses from a single-member LLC will be reported on Schedule C of the member’s (owner’s) tax return. However, All tax benefits available to LLCs will be available to the owner without regard to other sources of income.
What is a member of an LLC?
A member is an owner of an LLC. Single-member LLCs have a single owner. Multiple-member LLCs have more than one member. LLC members do not have to have equal shares of the company. There is no limit to the number of members an LLC can have, but the election to be taxed as a Sub S corporation may not be available to LLCs that have more than 100 members.
What is a registered agent for an LLC?
LLCs must have a registered agent at a physical address to receive business communications and legal process during business hours. The owner of an LLC can act as the LLC’s registered agent. Still, failure to maintain an office where business documents can be received may invalidate the charter and lead to the revocation of liability protection and loss of tax breaks.
What is a statutory agent for an LLC? What is a resident agent for an LLC?
These are additional terms for a registered agent.
What are the bylaws for an LLC?
LLCs have “operating agreements” instead of “bylaws,” which are more frequently associated with corporations. For further information about operating agreements, please see below.
What is an operating agreement for an LLC?
The operating agreement for an LLC is a document specifying owner and member rights in and duties to the company. It establishes ownership of the LLC, outlines the rules that govern the business, and clarifies the responsibilities and rights of owners, who are also known as “members.” The operating agreement is created to prevent owner disagreements, ambiguous responsibilities, personal lawsuits, and other problems that can arise in the operation of the business.
Most operating agreements will have six sections:
- Management and Voting
- Capital Contributions
- Membership Changes
Even a Single-Member LLC should have an operating agreement. For a single owner, the operating agreement can help sort out business and personal assets. Additionally, it can contrast taxable and non-taxable income, and guide the change of ownership after the retirement, disability, or death of the member.
What tax form does an LLC file?
LLC’s whose members have not filed an election for their LLC to be taxed as Subchapter C or Subchapter S corporation do not necessarily file a tax return at all.
Under the old rules, a Single Member LLC was treated as a “disregarded entity.” Revenues and expenses were reported on a Schedule C attached to the owner’s Form 1040. Or Multiple Member LLCs filed a Partnership Return on a Form 1065 and gave their members K-1’s to report on Schedule E with their federal personal income tax returns.
These are still the rules for LLCs whose owners do not opt for tax treatment as if they were C or S corporations. An LLC that opts to be treated under Subchapter C will file Form 1120 for its tax return, and an LLC that opts to be treated under Subchapter S will file Form 1120-S. But the LLC must file an election to be taxed under these rules, and that election must be received and approved by the IRS, before the beginning of the tax year it is reporting. This is not a decision that LLC owners can put off until it is time to file taxes.
What is an LLC partnership? Is it the same as an LLP?
Any LLC with at least two partners is treated as a partnership. This is not the same thing as an LLP or a limited liability partnership.
In most partnerships, each partner is liable for the debts and court judgments incurred by any other partner. In a limited liability partnership (LLP), each partner is responsible only for the debts and court judgments that partner incurs.
LLPs are popular for organizing partnerships of doctors, accountants, attorneys, and accountants. If one doctor in an LLP loses a court case and must pay a judgment for malpractice, for instance, the other doctors in the partnership will not be exposed to her liability. Some states only permit LLPs for groups of partners providing professional services. Others permit LLPs for other kinds of business activities but require the members to organize as an LLC before they apply for LLP status.
What is an annual report for an LLC?
Annual reports keep the state up to date on the names and addresses of member(s) and the registered agent. The annual report will confirm important numbers for the business, such as its EIN and the numbers of any state licenses, confirm its purpose, and identify any managers with the authority to make contracts for LLC.
Not every state requires an annual report. Failure to file annual reports may result in loss of liability protection for the owners/members of the LLC.
What is the due date for LLC tax returns?
Single-member LLCs that have not elected to be taxed under rules in Subchapter S or Subchapter C of the Internal Revenue Code are “disregarded entities” for federal tax purposes. They do not file tax returns. Usually, the owner must report revenues and expenses on Schedule C attached to Form 1040 by April 15.
Multiple-member LLCs that have not filed elections to be taxed under rules in Subchapters S or C file partnership returns on Form 1065 by March 15. And LLCs that have elected to be treated as corporations for purposes of federal income tax file their returns before the fifteenth day of the third month after the end of their fiscal year.
If I file personal bankruptcy, what happens to my LLC?
When you file personal bankruptcy, your “estate” or your personal assets include your LLC. If you own a Single-Member LLC, your bankruptcy trustee may opt to sell individual assets of your business to satisfy your debts or sell the entire business. If you are in business with partners or other shareholders, they can be expected to pay your debts if they have not kept their personal spending strictly separate from the business.
Even if you have been careful to keep your business and personal finances separate, the bankruptcy trustee can take over your interest in the business and vote to sell it. Personal bankruptcy can cause serious problems for business partners, even if you have followed all the rules for LLCs.
What is the difference between a holding company LLC and an operating company LLC?
LLCs that are set up to be holding companies perform no operations other than owning another company or companies, called operating companies. Operating companies are where business activities occur. Setting up a holding company is ideal for owners of multiple businesses who want an additional layer of protection from liabilities from the individual companies they operate.
Holding companies typically have greater access to credit and operating capital than their operating companies. They acquire greater name recognition and goodwill. There are situations in which owners of a holding company can defer taxes by having their operating companies distribute income to the holding company rather than directly to owners.
What is a member-managed LLC?
In a member-managed LLC, all the owners (members) have the authority to bind the LLC to contracts and agreements. They also take part in day-to-day operating decisions for the business.
What is a manager-managed LLC?
In a manager-managed LLC, the authority to find the LLC to contracts and agreements is limited to one or more members. These members are appointed as “managers,” or to an “outside” manager who runs the business for the owners. LLC Members can advise LLC Managers, but an LLC Manager does not have to follow or agree to this advice.
In most states, the operating agreement must specify whether the company is member-managed or manager-managed. This allows vendors and lenders will know who is responsible for paying them.
What is an executor of an LLC?
The executor of an LLC is the person who forms the company. They also submit the Articles of Formation to the Secretary of State to request the formation of the LLC.
Who is an authorized member of an LLC?
An authorized member is an owner of the LLC who has the authority to conduct business transactions (ordering inventory, borrowing money, setting salaries, and so on) binding on the LLC.
Who is an authorized representative of an LLC?
An authorized representative of an LLC is a non-member (a non-owner) who has the authority to conduct business transactions binding on the LLC.
What do you call the owner of an LLC?
Owners of LLCs are referred to as “members” of their LLC.
What happens to assets when an LLC is dissolved?
The dissolution of assets is determined by the Operating Agreement that every LLC should create when it’s formed. If an LLC is dissolved as the result of bankruptcy, then the bankruptcy trustee chooses the disposition of assets.
What are the tax advantages of an LLC?
All members (owners) of LLCs can take advantage of a deduction of up to 20 percent of their qualified business income by attaching a Form 8995 to their federal income tax returns.
What is Asset Acceptance LLC?
“Asset acceptance” is not a kind of LLC. Asset Acceptance LLC is a company that buys or “accepts” charge-off debt and attempts to get original debtors to pay. This company does business as “Asset Acceptance LLC.”
What do I need to open a bank account for my LLC?
You can open a bank account for your LLC after you receive your certificate of formation from your Secretary of State. You also need an employer identification number (EIN) from the IRS.