What Is an LLC?
An LLC, properly called a limited liability company, is one of several legal business structures available to business owners. An LLC must be formally established and legally maintained according to the laws and procedures in the state of establishment. Though the legal structure of an LLC and its maintenance requirements are largely similar from state to state, there may be important differences. Thus, the following introduction is meant to be a general guide. Before establishing an LLC yourself, obtain additional information relevant to your state laws. Also consider speaking to an attorney and a business lawyer for professional advice.
An LLC Compared to Other Business Structures
Similar to a corporation, the owners of an LLC -- officially called members rather than owners -- are granted limited liability status in respect to the actions and debts of the LLC. In most cases, an LLC member’s liability is limited to his or her investment in the LLC. That is to say, a member’s personal assets, property, and possessions unaffiliated with the LLC are protected from legal action arising from the LLC. This contrasts starkly with sole proprietorships and partnerships, in which the owners are personally responsible and legally liable for the debts and actions of the business.
On the other hand, in contrast to a corporation, an LLC does not pay income taxes. Indeed, the IRS does not recognize LLCs as federal tax entities at all. Rather, an LLC’s profits and losses pass through the LLC to the members, similar to a sole proprietorship or partnership. Though other options may be available in some cases, LLC members typically report LLC profits or losses on their own federal tax returns.
Typical LLC Formation Procedure
An LLC must be registered at the state level. In most states, there is a single registration agency that deals with business formation, typically called the Division of Corporations. This agency is commonly a part of the Secretary of State’s office. To identify the business registration agency in your state, visit the U.S. Small Business Administration website and access the index of state business registration agencies (see the link on this page).
In most states you can access LLC registration documents online for download and printing. To complete these papers, usually named Articles of Organization, you will require a business name unique among all the businesses registered in your state. In most cases, you can run a simple online search of the registration database to ensure your business name is available. Next, you will be required to identify a registered agent for your business. A registered agent must be a person with a physical address in your state. He or she must also agree to be available to accept legal papers on behalf of the LLC. This person may be yourself or virtually anybody else. Finally, each member -- that is, each owner -- of the LLC must be identified on the organizing documents.
Shortly after submitting the completed Articles of Organization, along with the required fees, you will receive confirmation of your registration and further instructions. In most states, you will be required to file formal annual reports on your LLC, the first report often being due within months after your initial registration. Failure to complete this requirement typically results in the dissolution of the LLC.
