Want to Form an LLC? Here's What You Need to Know

by ExpertEntrepreneur

Before you form an LLC, make sure you understand what an LLC is, how it functions and any potential benefits and drawbacks.

An LLC is one of the most popular business entities today and the business structure of choice for many small business owners and entrepreneurs. If you want to form an LLC, you probably have a lot of questions, including how to incorporate a business to begin with and what makes an LLC so beneficial. Here's a look at some questions you may have about forming a limited liability company.

Image: FreeDigitalPhotos.net/David Castillo Dominici

What is LLC?

LLC stands for limited liability company and this business entity offers limited liability protection, which protects your personal assets from business debts and obligations, much like a corporation. Limited liability companies also offer very flexible organizational structures and tax options, like a partnership, which makes them a hybrid entity.

To form an LLC, you need to file Articles of Formation for your business, although LLCs are not corporations. There are no rigid rules in place and you are not required to designate managers and an LLC may have a single member, or owner. The owners of an LLC are referred to as members and those managing the business are called managers.

Why is it a good idea to form an LLC?

There are numerous benefits to choosing an LLC vs corporation or other business structure. Here are some of the reasons limited liability companies have become so popular:

Limited liability companies are very flexible and may be complicated or simple. There is no legal requirement to hold annual meetings, nor are there many requirements about the operating agreement the LLC must operate under. While operating agreements are important, they may be very simple and most states have few requirements for limited liability companies.

LLCs are also very flexible in terms of taxation. If the LLC has one member, it's taxed as a sole proprietorship. Those with more than one member are automatically considered a partnership for tax purposes. Limited liability companies with one member do not need to file a tax return as all profits and losses are reported on the owner's individual tax return. If the owner or owners do not want to be taxed as a partnership or sole proprietorship, a simple form filed with the IRS will convert the LLC into a C or S corporation.

As a pass-through entity, LLCs are not subject to double taxation like a corporation.

LLCs have far less state-imposed compliance restrictions and formalities to worry about with few restrictions on who can form a limited liability company or how many owners an LLC may have.

It's far more affordable to form an LLC than it is to form a corporation, particularly when it comes to a Delaware LLC, which has the cheapest fees in the United States.

How is an LLC taxed?

LLCs themselves do not pay taxes, as they are considered pass-through entities. Instead, taxes are paid by the members, or owners, in proportion to the money they receive as profit from the company.

Which state is the best to form an LLC?

For most businesses, their home state and where the company operates is the best place to form an LLC. Still, Nevada and Delaware LLCs are very popular as both states have very corporate-friendly laws. To form an LLC in any state other than your home state, you'll need to qualify to do business in your home state first.

How is an LLC formed?

To form a limited liability company, you must prepare and file Articles of Formation in the state of your choice. Once this is filed, the LLC is formed. It's still a good idea to draft and sign an LLC Operating Agreement and obtain an Employer Identification Number, or EIN, from the IRS.

Do I need a registered agent?

A registered agent is an individual or authorized corporation appointed by the LLC to accept legal documents from third parties and the state on behalf of the LLC. The registered agent must have an address in the state in which the LLC is formed. If you form an LLC in the state in which you operate, you may name a manager or member of the company as the registered agent and provide the business address.

Updated: 06/08/2013, ExpertEntrepreneur
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