What is an LLC? Everything You Need to Know

What is an LLC - Limited Liability Company (LLC)

Do you know what is an LLC and why do you need it? A limited liability company (LLC) is a U.S. corporate structure, which is also present in other countries and one of the most popular structures, where the members of such a company are not personally liable for the obligations or liabilities of the company. Limited liability corporations are hybrid structures incorporating a corporation's attributes with those of a partnership or sole ownership. It is a type of legal business structure developed to give a lower level of liability for business owners. LLC owners face considerably lower limits on corporate actions and debts, as per the IRS.

Protecting your personal assets and your livelihood as a business owner is a top concern. You may know that establishing your entity as an L.L.C. or a Limited Liability Company allows you to do this easily and usefully while reducing your tax burden at the same time. The corporate entity that you choose affects everything from daily operations to taxation, and manage the level of risk of your personal assets. The structure of your business should strive to correctly balance any legal protections and tax benefits.

An LLC can be an excellent model if you are ready to officially divide your business and personal property, but do not plan to go public or take on external investment. It is important to weigh the pros and cons of any business structure, which is why it is necessary to explore the choices with an experienced corporate attorney at bestlegalchoice.com.

Common Types of Business Structures in the United States

According to the IRS[i], the most common types of business structures in the United States are the sole proprietorship, partnership, corporation, and S corporation. A Limited Liability Company (LLC) is a business structure allowed by statute of the state.

1)    Sole Proprietorships

2)    Partnerships

3)    Corporations

4)    S Corporations

5)    Limited Liability Company (LLC)

Why should you form an LLC?

Among the first choices you might decide being an owner of the business is which structured organization is correct for your business. It is important to follow the procedure for forming an LLC; otherwise you may remain as a partner or a single proprietor. But, for multiple reasons, this is often not the best choice.

Most small and medium businesses are structured as limited liability companies because an LLC provides the same liability protection as a corporation but with a less hierarchical structure and less operational requirements. But they don't all need an LLC. Many corporations are going to do just fine as single ownerships, while others are going to have to form a company instead.

An LLC allows you to take benefit of both the corporation structures and the business partnership structures. In most cases, LLCs shield you from personal liability, and in case your LLC faces bankruptcy or litigation, your personal assets— such as your car, house and savings accounts — will not be at risk.

Profits and losses can be transferred to your income without having to face taxes. Members of an LLC, however, are actually self-employed and should pay tax payments to Medicare and Social Security for self-employment. In many jurisdictions, LLCs may have a limited life. When a member joins or leaves an LLC, certain states may require that the LLC be disbanded and re-formed with new membership — unless an arrangement is already in place within the LLC to purchase, sell, and transfer ownership. Please note that it is not possible to form all companies as an LLC. For example, it is not possible to organize companies operating in certain industries such as financial institutions (mainly banks), trust and insurance as an LLC. Several states may also forbid the creation of more industries as an LLC. As such, if you are contemplating creating an LLC, you have to check with the Secretary of State or speak with a business attorney at Best Legal Choices to decide if it is legal under the laws of your state. Irrespective of the state you select, you have to file articles of association or organization for that state with the appropriate agency. As part of this process, you must select an authorized agent within that state to recognize process service (i.e., for the purpose of consenting to the authority of the government). This paper work is generally submitted with the office of the Secretary of State. At the time of filing, a fee is required.

LLCs are broadly being used by business owners around the United States due to their flexible nature. They deliver many of a conventional corporation's security with a partnership's versatility. Furthermore, LLCs are not subject to the more burdensome requirements for filing and reporting to which companies are subject.

What are the Advantages and Disadvantages of Forming an LLC?


1.    Limited personal liability of the members

Members are not directly responsible or will have to face any personal liability for the company's actions. This ensures that personal assets of members— properties, cars, bank accounts, savings — are secured from lenders trying to collect from the company. That security remains in place as long as you are running the up-and-up company and maintaining separate business and personal finances.

2.    Reduced documentation and paperwork

Corporations may offer restricted personal liability as well, but they must comply with certain regulations that may not be well suited to a small business operating informally. Corporations, for example, typically have to hold annual shareholder meetings, report annually, and cost the state annual fees. They also tend to have significant requirements for record keeping.

LLCs, on the other hand, may not have to hold annual meetings and are often not generally required to maintain extensive records. LLCs are not required to file annual reports in many states of the United States.

3.    Ease of management

An LLC may choose to be handled by its members, allowing all owners to retain in the day-to-day policy-making of the business, or by managers who may be members. When participants are not experienced in running a business and want to hire people who are, this is beneficial. An LLC is governed by default in many states unless otherwise expressly stated in filings with the State Secretary or the equivalent department.

4.    Tax Benefits

As far as taxation is concerned, LLCs get the full package. LLCs have no federal tax classification of their own, but may adopt the tax status of other common business structures.

The IRS automatically categorizes LLCs, depending on whether they have one owner or more than one owner, as either partnerships or sole ownerships. It means that LLCs could always reap the benefits of "pass-through" taxation where no LLC taxes or corporate taxes are charged by the LLC. Rather the income and expenses of the LLC pass to the personal tax returns of both the owners, and the owners pay personal income tax on any gains.


1.    Certain restriction on liability in some cases

A judge can rule in a court case that your structure of the LLC does not protect your personal assets and you can be held personally liable. The behavior is called “Veil Lifting”, popularly found in the famous Saloman V Saloman case of Company Law. The principle set down is widely applicable in many countries including the United States. Under this  you may be at risk if, for instance, you are not clearly distinguishing business transactions from personal transactions, or if you have been shown to have run the business unlawfully in ways that have resulted in losses to others.

2.    Result of members leaving the LLC

In several states, if a member leaves the company, goes bankrupt or expires, LLC has to be dissolved and the remaining members will be responsible for all remaining legal and financial responsibilities required to terminate the business. Furthermore, these members can still do business; they will have to start from zero a whole new LLC.

3.    Complexity in transfer of ownership

Poor versatility in the transfer of ownership. Usually, ownership is more difficult to switch than a corporation. The members will specify in the operating agreement of the LLC whether or not ownership can be passed and if so whether the other members need to be approved.

4.    Jurisdictional issues during a lawsuit

LLCs are governed by state's law, but what if you have a dispute that intersects boundaries between states? LLCs are regarded as partnerships, not corporations, for the purposes of federal civil procedure. Another way this can manifest is that the option of which state court to hear the dispute can be limited.

What is an LLC Versus a Corporation?

All LLCs and corporations are registered business entities that protect holders of the company's liabilities and responsibilities from personal liability. There are variations in its forming process, ownership, administration, and taxation. LLCs have smaller requirements for governance and may choose to be taxed as a C-corporation or pass-through organization.

Two factors that are important for any small business owner— your cash and time— will affect your option between choosing an LLC vs. corporation Your tax burden, the willingness of investors to raise money, and the ease with which you can grow in the future depends partly on your business entity. The judgment of the LLC vs. corporation also influences the time you spend establishing your business entity and holding your firm in good standing. For this reason, it is strongly recommended to talk to an attorney on our best legal choice platform to choose the system that best suits your business model.

If the LLC formation is an easy process, why is hiring an attorney important? What is an LLC formation process like?

LLCs can be set up and registered very quickly. These typically require the Secretary of State to file necessary documents and pay the filing and registration costs. You can then request and collect your Employer Identification Number, or EIN, from the Internal Revenue Service when you've set up your LLC. You can then open business accounts and checks by obtaining your EIN. The manager of the LLC can then enter into contracts with other companies and people operating as the LLC, and people can also pass their patents to the LLC. Since it is difficult to change the name of an LLC, when making the first selection, it is highly essential to choose it wisely. The name must therefore be something which is not already registered as another company with the state. Your attorney will assist you with your LLC's name choice.

Most entrepreneurs and businessmen ask if they need to use an attorney's assistance to start an LLC. While there is no legal requirement when starting an LLC to use an attorney, doing so is highly recommended. While the Web can provide an almost infinite set of terms, different types of content, including some positive opinions on the development process itself (such as forums, for example), no matter how outside the box you think your new business is, there can be some risk to manage and concerns to answer that none of the numbers of blank filling in a ready-made form can easily be done for.

Although creating an LLC is a painless process, professional advice from an expert business formation attorney at BestLegalChoice is still relevant for you. Various types of legal entity structures are available through which the company will function. Depending on your business type, size and whether you plan to issue stock, among other factors, the best legal framework for your company can differ. Each provides different levels of protection for liability. The different types of corporate structures also have different tax criteria and reporting requirements. An attorney who practices law in the field of business training and planning will help you choose the system that works best for you.

Setup your LLC

Now that you are well versed on what is an LLC and how the business structure works, you can readily take appropriate measures to establish your business accordingly. If you require any help to form an LLC, reach out to a business formation lawyer on BestLegalChoice. Post your job and get bids from top attorneys and lawyers on any of your business formation and establishing an LLC needs. We have qualified and experienced to handle your cases.


[i] https://www.irs.gov/businesses/small-businesses-self-employed/business-structures


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