The 2022 guide to understand everything about what an LLC is, as well as its benefits, costs and setup steps.
What is an LLC and what does it do
A limited liability company (LLC) in the U.S. is a flexible business structure which protects its owners (members) from being personally pursued for its debts or liabilities.
A limited liability company is just one of several business structures. Other common examples include:
- General Partnerships
- Sole Proprietorships
LLCs are essentially a hybrid entity that combine the many business structure characteristics and let you take advantage of the sole proprietorship, corporation, and partnership business structures.
Unlike other business structures, owners in LLCs are not liable for their business’s debts and the regulation of LLCs varies from state to state. It’s also worth noting that any entity or individual can be a member of an LLC with the notable exceptions of banks and insurance companies.
Most states do not restrict ownership, thus members can include individuals, corporations, other limited liability companies and foreign entities. Also, there is no maximum number of members and most states permit “single-member” LLCs i.e. those having only one owner.
What are some examples of LLCs?
Some LLCs are designed for professional services, such as doctors or lawyers, while others are large companies that use LLCs to take advantage of interstate commerce laws.
Some LLC examples:
- Boutique store selling clothes
- Bagel stores
- Family-run grocery stores
- Gyms and workout facilities
- Coffee shops and cafes
- House Painters
- Golf cart rental businesses
- Self employed business owners
- Tech companies (Yes, even tech behemoths like Google, Amazon and Facebook have LLC structures)
What companies cannot be LLC’s
A few types of businesses generally cannot be LLCs, such as banks and insurance companies. You’ll need to check your state’s requirements and the federal tax regulations for further information. There are also special rules for foreign LLCs.
Why do I need an LLC?
Smart business owners often use LLCs over corporations for many reasons. Major benefits of LLCs include its personal liability protection without dealing with red tape, paperwork, or formalities that can be difficult for a small business, young business, or sole entrepreneur.
By contrast, if you operate a sole proprietorship or general partnership, you and the business aren’t legally separate, and everything you own is at risk.
Most states allow residents, individuals who live outside the state or country, other LLCs, corporations, pension plans, and trusts to serve as LLC owners.
Who can own an LLC?
The following individuals or entities can be LLC owners in all 50 states:
- US citizens
- Non-US citizens
- US residents
- Non-US residents
- US foreigners
- US immigrants
- Other LLCs
- Other corporations (both C and S-corporations)
- Pension plans
- Individual retirement plans (IRAs)
- Other legal entities
Note however that non-US citizens must possess a green card or E-1 or E-2 visa to own an LLC; an ITIN card is not enough, although it will qualify you to be an S corporation shareholder.
The ITIN will be needed for non-resident LCC owners when it comes time to file taxes, as this will identify them to the IRS. It can be obtained by filing form W-7 with the IRS. Regular US residents use their Social Security number for this.
Where should I form my LLC?
Small businesses starting a business for the first time often ask where they should form their limited liability company. There is a lot of hype about forming LLCs in Delaware, Nevada and Wyoming.
However, in most cases you should form a domestic limited liability company in the state where your business will be located. Some large investors and bankers prefer working with Delaware businesses due to Delaware’s business-friendly laws.
However, this rarely offers enough of an advantage to the small business owner to justify the added cost and paperwork of registering in multiple states.
LLC’s Pros and Cons
What are the pros of having an LLC?
Owners of an LLC have many benefits including financial and legal protection similar to corporations without double taxation. Plus, owners are not responsible for business debts. If the business owes money and can’t pay, only their business assets are at risk.
Your business is most likely to benefit from being an LLC if either of these is true:
- You have co-owners or employees: Without an LLC or other business entity, your personal assets are at risk if your business is sued for something a co-owner or employee does. An LLC’s operating structure also helps to avoid conflict and misunderstandings between you and your business partners.
- Your business has significant risks: Some types of businesses are at high risk for failure. Others have both financial and liability risks. For example, multiple LLCs are a common strategy for rental property owners to ensure that financial problems with one rental don’t jeopardize the others—or your own life savings.
LLCs also offer these benefits to small businesses:
- Limited liability protection
- Pass-through taxation
- LLC tax options
- Increased credibility
- Access to business loans and credit
What are the cons of having an LLC?
LLCs offer many benefits but there are some disadvantages including:
- Income taxes: As LLCs are pass-through entities like a sole proprietorship, LLC owners are responsible for paying taxes on their share of LLC income, whether or not they are given a disbursement. This is why LLCs don’t attract investors like a corporation.
- Documentation: All members must wait until the LLC sends out K-1 forms to complete their personal taxes. For this reason, most investors will not fund LLCs.
How much does it cost to setup an LLC
The main cost of forming a limited liability company (LLC) is the state filing fee. This fee ranges between $40 and $500, depending on your state, excluding add-ons.
In some states, there are additional costs related to LLC formation. For example, you might be required to publish notification about your LLC formation in a state-approved newspaper.
There are two options for forming your LLC:
- Hire a professional LLC formation service to set up your LLC (for an additional small fee)
- Submit the LLC formation documents yourself
If you’re unfamiliar with the LLC formation process, then hiring a professional LLC service may be the best option to ensure a smooth and quick formation.
Two reliable company formation services include:
What do I need to start an LLC?
Unlike some other business structures, you can form an LLC in any state, regardless of your physical business presence.
To start an LLC, you’ll need to:
- 1). Select the State to setup your LLC
- 2). Name Your LLC
- 3). Choose a Registered Agent
- 4). File LLC Articles of Organization
- 5). Create an LLC Operating Agreement
- 6). Get an EIN (Employer Identification Number (EIN)
How do LLCs pay themselves?
LLC’s pay themselves through an owner’s draw. This method of payment essentially transfers a portion of the business’s cash reserves to you for personal use. For multi-member LLCs, these draws are divided among the partners.
Do LLC laws vary by state?
Yes, laws vary regarding LLCs in each state. When you form an LLC, you form it under the laws of a particular state, not the federal laws of the U.S. Each state’s LLC law is unique and other relevant laws including those regarding liability, privacy, and taxes vary from state to state.
How are LLCs taxed?
LLCs profits and losses are passed through to members, who report them on their individual tax returns. LLCs can be taxed as sole proprietorships, partnerships, C corporations or S corporations and this choice allows members of an LLC to minimize their tax burden.
Tom is the founder of Gottagrow.io. He reads the offers, deciphers the details including features, pricing, included services and more to find you the best products and services.