Limited Liability Company
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Why Should You Register a Limited Liability Company?
A Limited Liability Company (LLC) is a formal business structure that is the simplest to form and maintain. Creating an LLC offers some of the same benefits as a corporation, without the costs and compliance complexity. Business owners who are looking for personal liability protection, tax flexibility, and management options may find that registering an LLC will be an ideal choice for their company.
Four Advantages of an LLC Business Structure
Next to operating a business as a Sole Proprietor or Partnership, Limited Liability Companies are the least complex and costly form of business to start and maintain from a state compliance perspective. The business registration paperwork to register an LLC is minimal as are the ongoing filing requirements.
Personal Liability Protection
Because an LLC is considered a separate legal entity from its members, its financial and legal responsibilities are also its own. So, if someone sues the business or the company cannot pay its debts, the LLC members are typically not held responsible. Therefore, their personal assets are at a lower risk of being seized to pay legal damages or settle debt than they would be if the business were a Sole Proprietorship or Partnership.
Tax Treatment Options
By default, a Limited Liability Company is considered a “disregarded entity” for tax purposes. As such, income tax is applied in the same way as it is to Sole Proprietorships and Partnerships. Business income and losses are passed through to its members’ tax returns and are subject to members’ individual tax rates. An LLC has other tax treatment options, too. Members can opt for an LLC to be taxed as a corporation, with profits taxed at its corporate rate. Or members of an LLC can choose S Corporation election, which allows for the LLC to have pass-through taxation but with the corporate benefit of a reduced self-employment tax burden because members only pay Social Security and Medicare taxes on their income taken as salaries; members’ dividend income is not subject to self-employment taxes.
An LLC may be either member-managed or manager-managed. In a member-managed LLC, the owners handle the day-to-day management of the business. In a manager-managed LLC, members appoint one or more managers to manage the company. In most states, an LLC can appoint members of the LLC to be managers, or it can hire someone else to do the job. The managers of an LLC usually have the authority to make certain decisions and run the day-to-day operations of the company while members retain authority over more significant strategic matters. Most states consider an LLC to be member-managed unless the formation paperwork indicates it should be manager-managed.
Types of LLCs
There are multiple types of Limited Liability Companies available. Before you set up your Limited Liability Company, it is best to consider your needs and then compare these requirements to the available LLC options. Below is a list of available LLC options, however, not all states recognize all types of LLCs, so entrepreneurs must review their state’s options.
- Single Member LLC – If a company will have just one owner or a married couple as the owner, it is considered a single-member LLC.
- Multi-Member LLC – If an LLC will have more than one member, it is considered a multi-member LLC.
- Member Managed LLC – When owners run the day-in, day-out operations of the business, the LLC is member-managed. Most LLCs use this structure.
- Manager-Managed LLC – When LLC members want to appoint a manager (who could be someone that the company hires or one of the members) to handle daily operations, the LLC is manager-managed.
- Domestic LLC – When an LLC has registered its formation documents (Articles of Organization) in a state, it goes on record as a domestic LLC there. That state is the company’s domicile (a.k.a. home state).
- Foreign LLC – If an LLC is registered as a domestic LLC in one state and is conducting business in another state (physical presence or economic Nexus), it must usually file as a foreign LLC in the additional state(s). Learn more about the foreign qualification process.
- PLLC – A Professional Limited Liability Company (PLLC) differs from the standard LLC in that only professional license holders (physician, attorney, accountant, etc.) may register the company. Like a regular LLC, a PLLC may elect to be treated as an S Corporation for tax purposes. Which can help minimize the self-employment tax burden on its members.
- Series LLC – Series LLCs are business entities (available in some states but not all) that have a parent (umbrella) LLC and other LLCs (series) beneath it with their own debts, obligations, and rights. Usually, individual series in the series LLC are taxed separately.
Top LLC FAQs
Can One Person Form an LLC?
Yes, all states allow single-member LLCs. There is also a multiple-member LLC.
What Is the LLC Organizer?
An LLC organizer is the person (18 years of age or older) or entity that prepares, signs, and files an LLC’s Articles of Organization with the state.
What Is an LLC Member?
An LLC member is a person or entity who is the owner of some or all of an LLC. Unless the LLC’s Articles of Organization specify managers will control the company, the members make all business decisions.
What Is an LLC Manager?
An LLC may be operated by a manager or group of managers who act much like a corporation’s board of directors. LLCs must outline in their Articles of Organization whether the LLC will be member-managed or manager-managed.
Does an LLC Have Stockholders?
No. LLCs are not permitted to issue stock in any state. Only corporations may issue stock.
How Is an LLC Structured?
An LLC may have one or more members. Members are the owners of the LLC, similar to stockholders in a corporation. Members typically receive an ownership stake in the LLC commensurate with their investment (either financial investment or sweat equity).
What are Membership Interests in an LLC?
A member’s ownership of an LLC is represented by “interests,” Just as a partner has an interest in a partnership and shareholders own stock in a corporation.
What Is a Member-Managed LLC?
Most multi-member LLCs choose the member-managed LLC option. In a member-managed LLC, all members participate in the decision-making process and the work of the company. Significant decisions, such as entering contracts and securing loans, must have approval by most of an LLC’s members.
Most states consider an LLC to be member-managed unless specified on the company’s Articles of Organization. While states don’t require one, a member-managed LLC should have an Operating Agreement explaining each member’s responsibilities in running the company, decision-making authority, and how profits should be distributed among members.
The member-managed management structure may be preferable if:
- The LLC’s members want to be actively involved in the company’s work, i.e., producing, selling, or supporting the production and sale of its products or services.
- The LLC has limited resources and does not want or can’t support a management level between the business and its owners.
Some possible downsides of a member-managed LLC include:
- Management of the business requires a lot of time and energy, which may take away from owners’ ability to work on strategic decisions.
- Investors might not be as interested in funding a member-managed LLC than they would a manager-managed LLC.
What Is a Manager-Managed LLC?
In a manager-managed LLC, members relinquish the authority to manage the business’s operations to whomever they designate as the manager or managers. The members in a manager-managed LLC typically make high-level decisions (such as entering contracts, signing loans, etc.) for the business. However, they do not get involved in day-to-day tasks or issues.
An LLC’s members can serve as managers. However, managers may instead be other individuals hired by the LLC or another LLC or corporation (if the state allows for that).
Note that although an LLC’s members may serve as managers, the manager role in a manager-managed LLC is not an ownership position. A manager—including any member that is designated as manager—gets compensated as an LLC employee. The employment income that a member earns as a manager is separate from that member’s status as an owner.
An LLC’s Articles of Organization must specify that it will operate as a manager-managed LLC. Also, the LLC should have an operating agreement that defines the roles and responsibilities of its managers and members.
A manager-managed LLC structure might be beneficial in situations where:
- An LLC with more than one member has owners that want to invest financially in the business but do not want to be involved in the details of running the company.
- An LLC’s members don’t have extensive experience running a business. By hiring someone with operations expertise, they can enjoy the perks of having their own company and feel confident that it’s in capable hands.
- An LLC has many members, and it might be difficult to get multiple owners to agree on everyday business decisions. Having a manager to handle operations removes the need for consensus of all members on every small detail involved in running the business.
- Parents in a family business want to involve their children in the company but don’t want to give up strategic decision-making.
Possible downsides of a manager-managed LLC include:
- It might be challenging to determine how much authority to give the manager.
- Some or all owners lose control over management decisions.
- A manager that’s not an owner may not have as strong an understanding of the company’s vision and values as a member manager.
- Paying a manager may create a financial hardship for a new LLC.
What Are the Tax Advantages of the LLC Structure?
As a “disregarded entity” for tax purposes, an LLC’s profits and losses flow through to its members’ personal tax returns. From a legal standpoint, an LLC is considered a separate entity from its members, so it provides some liability protection to its owners. Generally, LLC members’ personal assets are not at risk if the company gets sued or cannot pay its debts.
LLC members may choose how their business will divide the company’s profits and losses among its owners. This allows members to consider not only money invested but also time and work contributions when distributing profits.
LLC members may elect to have their LLC treated as a C Corporation or S Corporation (if they meet the qualification requirements).
What Are the Potential Tax Disadvantages of the LLC Structure?
All an LLC’s business profits are subject to Social Security and Medicare taxes. This may create an unfavorable financial situation for LLC owners. They must pay self-employment taxes on their distributive share of the LLC’s profits, even if they invest that money back into the business.
What Is the Difference Between How LLCs and S Corporations Are Taxed?
Both the LLC and S Corporation structures are taxed on a pass-through basis. Income taxes are paid at the individual owner level rather than at the entity level. Profits and losses get reported on the owners’ personal tax returns.
However, although LLCs and S Corporations are both pass-through entities, there are some differences in how taxes are handled.
- Self-employment tax – Income of an LLC flows to the members involved with the business and is subject to self-employment tax. With an S Corporation, only salaries are subject to self-employment tax. Therefore, any distributions that paid out to S Corporation owners are not subject to Social Security and Medicare taxes.
- Tax flexibility – The LLC offers a lot more flexibility in terms of how owners can be taxed. With an LLC, owners can determine their allocations for the year and be taxed accordingly. With an S Corporation, owners must be taxed based on their pro-rata ownership interests. For example, if one owner owns 50 percent of the business, then that person will be taxed on 50 percent of the company’s profits.
What Is the LLC Organizational Meeting?
The organizational meeting is held after an LLC has filed its formation documents. At the organizational meeting, many initial tasks are completed, such as:
- Ratifying the Articles of Organization
- Electing managers (if the LLC will be manager-managed)
- Approving the LLC Operating Agreement
- Issuing membership certificates
- Authorizing a resolution for opening a business bank account
- Agreeing to an annual meeting date or opting for no annual meeting
Other business matters may also be discussed and decided upon at the organization meeting.
What Is an LLC Operating Agreement?
An LLC Operating Agreement is an official contract that spells out the management and ownership of the company. It may outline details like:
- How much of the company each member owns
- Members’ voting rights
- How profits and losses should be distributed among the LLC members
- What happens when someone wants to leave the business
Do You Need an Operating Agreement to Start an LLC?
States do not require business owners to create an operating agreement to form an LLC. However, many states require an LLC to keep an operating agreement at its principal place of business to maintain corporate compliance. Even in states that do not require a formal operating agreement, it can be beneficial to maintain one. An LLC Operating Agreement helps avoid misunderstandings by clarifying the roles and responsibilities of the LLC’s members.
Does an LLC Need to Hold an Annual Meeting?
States do not require LLCs to hold annual meetings. This is one of the benefits of the LLC; it has fewer formalities than a corporation. However, if an LLC’s Operating Agreement requires an annual meeting (or other meetings), it must hold such meetings to stay compliant. Many owners choose to make meetings optional in the Operating Agreement.
What’s the Difference Between an LLC and PLLC?
In many states, licensed professionals, such as lawyers, doctors, architects, and accountants, aren’t allowed to form LLCs. This is because the states don’t want licensed professionals to escape personal responsibility for malpractice by hiding behind the LLC structure’s personal liability protection. Instead, states offer the option of forming a PLLC (Professional Limited Liability Company), a special type of LLC that’s designed for licensed professionals. PLLC rules vary by state.
One of the key differences between an LLC and PLLC is that members of the PLLC must be licensed professionals. To register the PLLC, they must show proof of a valid professional license. In most cases, members of a PLLC are personally liable for their own malpractice claims. However, they aren’t personally liable for other PLLC members’ malpractice claims.
The LLC and PLLC are state constructs. As such, rules vary widely by state. For example, professionals in New York cannot form an LLC but may form a PLLC. Professionals in California cannot form an LLC or a PLLC but can form an RLLP (Registered Limited Liability Partnership) or PC (Professional Corporation). And professionals in Arizona can choose between an LLC or PLLC. The specific rules within a state may also depend on the type of profession.
Like an LLC, the PLLC creates a separation between the individual owners and the business. A PLLC will typically protect its members from personal liability for the business debts and the malpractice of other owners within the company. However, a PLLC member will still be personally liable for malpractice claims related to that individual’s own actions. For this reason, members can benefit from having a good malpractice insurance policy.
The process to form a PLLC is more involved and takes longer than forming an LLC. Typically, the state licensing board must first approve the PLLC’s Articles of Organization. Then the PLLC must file the Articles of Organization and other formation paperwork with the state. Most states require a signature and license number of a licensed professional to form the LLC.
What Is a Registered Agent?
LLCs must designate a registered agent in the state(s) where the company is registered. A registered agent (sometimes referred to as a resident agent) is a person or company officially recognized by the state that resides within the state of incorporation. It is designated by the LLC to accept service of process on behalf of the company. A registered agent may be an individual or another business entity with a physical location in the state of incorporation.
Please note that a post office box or other mail service (e.g., UPS) is usually not sufficient to qualify as a registered agent. The agent is responsible for accepting official notices from the Secretary of State and service of process in the event the corporation is sued.
An LLC’s registered agent must be available Monday through Friday from 8 am to 5 pm at the location specified on the LLC’s Articles of Organization. The registered agent’s name and address are public information, therefore giving some privacy protection to an LLC’s owners.
If an LLC Operates in Multiple States, Does It Need a Registered Agent in Each State?
If an LLC is foreign qualified to do business in other states, those states will generally require an LLC to have a registered agent there. For example, if a California LLC has filed the necessary paperwork in Nevada to conduct business in the State of Nevada, the state of Nevada will require a Nevada registered agent. This may be an individual or another business entity that has a physical location in the state of Nevada.
What Happens if an LLC Does Not Have a Registered Agent?
All LLCs are required by law to have a registered agent. If an LLC does not pay the fee charged by its designated registered agent, it may be considered defunct by the Secretary of State and lose its corporate status. This can be detrimental because the LLC’s owners risk losing the LLC structure’s personal liability protection.
What Is an Initial Report and Does an LLC Need to File One?
In certain states, new Limited Liability Companies must file an Initial Report, also known as an initial Statement of Information with the secretary of state’s office. Usually, the Initial Report is due shortly after the LLC is formed with the state. Schedules for each state vary. Failure to provide the required information on time may result in such penalties and late fees by the state. An LLC may also be subject to suspension or dissolution if it does not meet the Initial Report deadline.
Information requested in an Initial Report may include:
- Name and principal address
- Business activity
- Principal phone number and email address
- Registered agent
- Mailing address
- Members’ names and addresses
Currently, new LLCs must file an Initial Report in the following states:
- New Mexico
Anyone can file the Initial Report on behalf of the LLC. However, in most cases, the state will require at least one LLC member’s signature.
What Is an LLC Annual Report Filing?
The Annual Report (sometimes called “Statement of Information”) is a state requirement for LLCs in most states; all states, except Alabama and Ohio require an Annual Report filing. States request Annual Reports so that they can keep up to date with LLCs’ vital information. The requirements for this filing vary from one state to the next. On our website, we provide specifics for each state.
Typically, LLC Annual Reports ask for information about the company’s:
- Name and principal address
- Business activity
- Principal phone number and email address
- Registered agent
- Mailing address
- Members’ names and addresses
LLCs must file their Annual Reports by the state’s due date. Scheduled filings vary by state. Usually, Annual Reports are due once a year on or around the anniversary date of the LLC. Some states require them every other year or on some other schedule (for example, Pennsylvania LLCs must file an Annual Report every ten years).
Related Reading: Annual Report List by State for LLCs and Corporations
Failure to submit the filing with the requested information by the requested deadline may result in the state’s assessment of penalties and late fees. In addition, states may also suspend or administratively dissolve an LLC if it doesn’t file its Annual Report.
Which Is the Best State for Forming an LLC?
You often hear of entrepreneurs registering their businesses in Delaware, Wyoming, or Nevada even if they don’t have a physical presence there. That’s because Delaware offers flexible, pro-business statutes. Wyoming and Nevada are attractive because they feature low filing fees and no state corporate income, franchise, or personal income taxes.
The general rule of thumb is that if an LLC has fewer than five members, it’s probably best to register in the state where members live or where the business has a physical presence (such as an office). Registering in a state that’s different from where the LLC has a physical presence brings additional fees and paperwork. For most small businesses, the added hassle and costs aren’t worth the potential advantages that come from being registered out of state.
When Is the Best Time to Register an LLC?
Often, it’s best to file an LLC as soon as possible after starting a business. After all, the main benefit is liability protection. By waiting, business owners expose themselves to liability.
An LLC’s start date is not retroactive. As a result, owners will probably need to file two sets of income tax returns for the business if it changes to an LLC mid-year. For example, if an LLC were formed on June 1, its owner(s) would need to file taxes as a sole proprietor or partnership from Jan. 1 through May 31 and then file taxes as an LLC from June 1 through Dec. 31.
How Can I Keep My LLC Compliant?
A Limited Liability Company must also pay attention to the ongoing compliance requirements it must fulfill to remain a legal entity in good standing with the state. Compliance obligations vary from one state to the next.
Some common examples of what many LLCs need to pay attention to include:
- Filing taxes
- Renewing licenses and permits
- Filing annual reports with the state
- Holding member meetings and taking meeting minutes
- Updating the state about significant changes in the business (e.g., change in address or adding a new member)
How Can I Create an LLC?
- File Articles of Organization with the State – Forming an LLC requires filing Articles of Organization with the state in which the LLC will operate. CorpNet can register an LLC in all 50 states to enable them to save time and money—and to ensure their documents are submitted accurately.
- Obtain an EIN – An EIN (Employer Identification Number) is a nine-digit unique number (similar to a Social Security Number) that serves as a form of identification for a business. An LLC is required to have an EIN to open a bank account, file for permits and licenses, hire employees, and conduct other business activities. An LLC can obtain an EIN for free from the Internal Revenue Service. A business can also ask CorpNet to handle completing and submitting EIN paperwork on its behalf.
- Create an Operating Agreement – An LLC’s Operating Agreement defines the roles and responsibilities of its members and managers. Even in states that don’t require operating agreements, an LLC (especially one that has multiple members) might find one helpful for preventing misunderstandings about who should be doing what and who has the authority to make certain decisions.
- Obtain Business Licenses and Permits – An LLC may need to have various business licenses and permits to operate in the state or local area legally. Depending on the nature of the business an LLC will conduct, it may need federal licenses, too. Business owners should check with the local municipality, county, and state to see what requirements apply to them. CorpNet can also provide additional information about licenses and permits.
- Start a Business Bank Account – An LLC must keep its finances separate from its owners. Therefore, it’s essential to open a business bank account and use it only for the purposes of the LLC. LLCs that commingle personal and business funds risk “piercing the corporate veil,” (i.e., breaking down the separation between the LLC and its owners), which could result in the owners losing their personal liability protection.
Learn More About Starting an LLC in Your Preferred State
Once you have decided to create an LLC, you must choose the state in which you will be incorporating or registering the LLC. Generally, if you have a small business and are going to be conducting a substantial amount of your business in your home state, the general norm is to incorporate it within your home state.
Most people choose Delaware, Nevada, or their home state. Delaware is often chosen, especially by larger companies, because it has the most developed and flexible corporate statutes in the country and is considered pro-business. Nevada has also become popular because of its lack of state corporate income tax, franchise tax, and personal income tax. It also has relatively low fees.
Nevertheless, if you have a small business and are going to be conducting a substantial amount of your business in your home state, it will likely be beneficial to incorporate it in that state. If you register your LLC out-of-state, but do much of your business in your home state, you may have to make a filing to “qualify to do business” in the state if there is a substantial ongoing business or physical presence in the state. You may then be subject to the same fees, taxes, and regulations as if you had incorporated there in the first place, and you will have paid filing fees (and, perhaps franchise taxes) to more than one state.
Browse through your state options for registering an LLC:
- Form an LLC in Alabama
- Form an LLC in Alaska
- Form an LLC in Arizona
- Form an LLC in Arkansas
- Form an LLC in California
- Form an LLC in Colorado
- Form an LLC in Connecticut
- Form an LLC in Delaware
- Form an LLC in Florida
- Form an LLC in Georgia
- Form an LLC in Hawaii
- Form an LLC in Idaho
- Form an LLC in Illinois
- Form an LLC in Indiana
- Form an LLC in Iowa
- Form an LLC in Kansas
- Form an LLC in Kentucky
- Form an LLC in Louisiana
- Form an LLC in Maine
- Form an LLC in Maryland
- Form an LLC in Massachusetts
- Form an LLC in Michigan
- Form an LLC in Minnesota
- Form an LLC in Mississippi
- Form an LLC in Missouri
- Form an LLC in Montana
- Form an LLC in Nebraska
- Form an LLC in Nevada
- Form an LLC in New Hampshire
- Form an LLC in New Jersey
- Form an LLC in New Mexico
- Form an LLC in New York
- Form an LLC in North Carolina
- Form an LLC in North Dakota
- Form an LLC in Ohio
- Form an LLC in Oklahoma
- Form an LLC in Oregon
- Form an LLC in Pennsylvania
- Form an LLC in Rhode Island
- Form an LLC in South Carolina
- Form an LLC in South Dakota
- Form an LLC in Tennessee
- Form an LLC in Texas
- Form an LLC in Utah
- Form an LLC in Vermont
- Form an LLC in Virginia
- Form an LLC in Washington
- Form an LLC in West Virginia
- Form an LLC in Wisconsin
- Form an LLC in Wyoming
Is Forming an LLC Right for Your Business?
Choosing a business entity type for your company has both legal and financial implications. We know there are lots of questions that come up and we’d like to provide a free resource to help you along your path to entrepreneurship.
Our free guide to forming an LLC is written by business attorneys at Corpnet.com. This guide answers the common questions for creating a Limited Liability Company for your new business.