An LLC is an easy and inexpensive way to structure your small business. It offers the same liability protection as a corporation but carries fewer restrictive administrative requirements.
Defining an LLC
LLC is an acronym for limited liability company. An LLC is a type of business entity formed under state law that governs its formation and oversight. Although every state defines what constitutes an LLC differently, all LLCs have the following in common:
- LLCs are separate and distinct entities. Like a corporation and partnership, an LLC can get a tax ID, open bank accounts, and otherwise do business under its own name.
- LLCs are formed by filing Articles of Organization (sometimes called Certificates of Organization or Certificates of Formation). Articles of Organization contain the information required by the laws of the state in which the LLC is formed.
- LLCs can be owned by one person or member (called a single-member LLC) or by two or more members (called a multi-member LLC). Members can be people or other entities such as corporations, partnerships, or even other LLCs.
- Members of the LLC can run the LLC (Member-Managed LLC), or the LLC can be run by managers chosen by the members (Manager-Managed LLC). The distinction between the two focuses on who gets to make decisions for the LLC as its agent (e.g., opening bank accounts, entering into agreements binding the LLC, etc.). In a Member-Managed LLC, the members act for the LLC. In a Manager-Managed LLC, only the managers do. Managers are often members but don’t have to be.
- The state where the LLC was formed treats the LLC as an entity separate from its members. However, the IRS views LLCs as if they don’t exist for tax purposes (i.e., as a pass-through entity); the LLC’s profits and losses pass-through to its members who report their share of profits and losses on their individual tax returns. LLCs don’t file their own corporate tax returns and pay no corporate taxes (unlike, for example, a corporation).
- LLCs protect members from personal liability for the debts and liabilities of the LLC. For example, debts of the LLC are not debts of the members.
The common characteristics above, particularly the ease and low cost of forming an LLC and the personal liability protection, make the LLC popular among startups and small businesses. Also, having a “corporate” entity may lend some heft to your business in the eyes of prospective clients, customers, and vendors.
Making the Right Choice for Your Business
Attorney Steven Becker is committed to providing attentive, personalized, and cost-effective legal representation for small businesses and creatives. If you are interested in forming an LLC or need assistance choosing the right structure for your business, contact Becker Law LLC today.