What is an LLC and How Does It Work?
What is an LLC?
An LLC stands for Limited Liability Company. It's a type of business that protects your personal stuff, like your home and car, if your business gets sued.
Who Owns an LLC?
People who own an LLC are called Members. You can have one Member (Single-Member LLC) or more than one (Multi-Member LLC). To start an LLC, you need to fill out some forms and pay a fee to your state’s Secretary of State or similar office.
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Why Do People Form an LLC?
The main reason for forming an LLC is to keep your personal assets safe. If your LLC is in trouble, only the LLC's assets can be used to pay off debts or lawsuits. Your personal assets stay protected.
Common Mistakes
- “Limited Liability Corporation”: This is incorrect. The right term is Limited Liability Company (LLC).
- “I’m going to set up an LLC for myself”: You can't set up an LLC for yourself. You set up an LLC for your business.
LLC vs. Corporation
Here's how LLCs and Corporations differ:
- Governance: LLCs don’t need a board of directors, but Corporations do.
- Records: LLCs don’t need to keep records of meetings, while Corporations do.
- Taxes: LLCs avoid double taxation; Corporations do not.
- Profit Sharing: LLCs can share profits in a flexible way; Corporations have stricter rules.
LLCs are popular because they’re simpler and more flexible.
Setting Up an LLC
Starting an LLC is usually cheaper than starting a Corporation. You only need to pay a one-time fee.
Keeping an LLC active is easy: you might need to file an Annual Report and handle state and local taxes. If you change your address, you just file a simple form.
📝 Note:
Not all states require Annual Reports.
Can One LLC Manage Multiple Businesses?
Yes, one LLC can handle several businesses, or you can create different LLCs for each business.
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How to Form an LLC
- Choose a Name: Pick a name for your LLC.
- File Forms: Complete and send the Articles of Organization (or similar) with the filing fee to your state's Secretary of State. You can do this online or by mail.
- Wait for Approval: Wait a few days for your LLC to be approved.
You may also need to create an Operating Agreement, get a Federal Tax ID Number (EIN), and file Annual Reports. Choose the state where you want your LLC and follow their rules.