What Is an LLC: FAQ and Answers – MarketWatch

Many well-known companies are LLCs or started as one. Google’s parent company, Alphabet, is an LLC, along with Pepsi-Cola, Sony, Nike, and eBay.

But what is an LLC? It’s a business structure created by your state’s statutes. Many business owners choose an LLC because that entity type protects their personal assets from the business’s debts and liabilities. If you own a small business, this is one of many reasons why you should consider turning it into an LLC. Here are some frequently asked questions about LLCs and what it takes to get one off the ground.

What does LLC mean? LLC stands for “limited liability company.” The LLC meaning centers on the “limited liability” aspect. LLC owners receive protection from personal liability from business debts and claims. For example, if a vendor sues you for an unpaid bill, they can collect against your business bank account, not the joint personal account you share with a partner or spouse.

Some people believe that “LLC” stands for “limited liability corporation,” but that’s a common mistake. Corporations are a distinct business entity type, and they are much more complex than LLCs.

No. “A corporation” is never the answer to the question, “What is an LLC?”

The main difference between an LLC and a corporation is taxation. LLCs are taxed the same as sole proprietorships, meaning their income reports are in the owners’ personal income tax returns. Corporations file separate returns in their names.

However, you can tell the IRS to tax your LLC as an S corporation. Generally, that tax status allows you to divide net income from the LLC into income and dividends. You and the other owners pay less in self-employment taxes when you do that. But making that designation doesn’t turn your LLC into a corporation; it merely defines how it is taxed.

Yes. When you form an LLC, you, and all other owners, are members. There is no minimum or maximum cap for the number of owners; you can create a single-member LLC where you are the sole owner or have a few dozen members if you so desire.

No. You can form a single-member LLC and receive the same limited liability protection as an LLC with many owners. The primary difference is tax treatment. Unless you elect taxation as an S corporation, you become a “disregarded entity.” Your LLC’s net income becomes self-employment income on your tax return. You will pay income taxes on it, including the self-employment tax.

The members manage the LLC, and they are called member-managers. It’s common in limited liability companies with two or three members to divide responsibilities.

But you have infinite flexibility in this department. You can divide management duties however you wish. For example, you can put contracting authority in one member-manager but have the other two handle day-to-day operations and employees. You can even place all management duties on members, while the others merely share in the profits. Another option is to hire nonmember managers and pay them a salary.

Sometimes, the answer to “What is an LLC?” is a little more expansive. LLC is a general designation, but sub-designations are available in some states. They may include:

• Professional LLC: A professional LLC, or PLLC, is a specific entity required for professional practices. Some states require doctors, lawyers, architects, engineers and chiropractors to create these PLLCs, rather than regular LLCs. If your business falls into any of these professions, check your state’s requirements to ensure you form the correct entity.

• Series LLC: The articles of organization in a series LLC allow a business to separate membership, assets, and interests into an independent series. For example, a graphic artist may want separate series that distinguish her client-based business from the gallery sales of her art. A series LLC may also be a holding company that serves as a parent company to other LLCs. Each series acts as an independent entity with a unique name, bank account, and records.

• Foreign LLC: You want to file your LLC in your business’s resident state. However, if you perform significant business transactions in another state, you may want to file there as a foreign LLC. A foreign LLC is an entity that conducts business in a state but maintains headquarters in another one. For example, if your business is located in Portland, Ore., and transacts business in Vancouver, Wash., you may wish to file as a foreign LLC in Washington.

For most people, the answer to “Which LLC is right for me?” is “just an LLC.” Unless you are in a profession requiring a PLLC in your state or want a more complex business structure with separate entities, you likely do not need a PLLC or series LLC. Also, you usually don’t need to file a foreign LLC unless you wish to bid on that state’s government contracts or that state’s law requires it for your industry.

What is an LLC may be clearer to you now, but you may still be wondering why you need one. A limited liability company offers significant advantages over sole proprietorships and corporations, including:

• Pass-through taxation: Unless you elect S corporation taxation status, the LLC does not require its own tax return. It passes through the members as self-employment income. This benefit allows the LLC to avoid corporate income taxes.

• Liability limitations: Business owners often switch from a sole proprietorship to an LLC when they have something to lose, whether a new home or a wooden boat collection. The “limited liability” part of an LLC prevents personal liability for the company’s debts and claims. For example, if someone sues the LLC for a nasty slip-and-fall accident and wins, they can only attach the company’s assets for payment – not your home or wooden boat collection.

• Less formality and paperwork: A corporation sounds prestigious, but it’s a high-maintenance entity. You must file reports, paperwork, and complex tax returns. You must also hold regular shareholders’ meetings and provide documentation of them. LLCs have fewer formalities. The only real formality in most states is an annual report.

The only disadvantage of an LLC arises if you wish to solicit capital or become a publicly-traded company in the future. Many venture capitalists will not finance an endeavor if it’s an LLC, and LLCs are not capable of being public. So, if those are your long-term goals, you may wish to file as an S or C corporation.

No. Even if you elect for S corporation taxation, that does not turn your LLC into a corporation.

For the most part, yes. The only requirement is you work “LLC” or ‘limited liability company” into the name. For example, most businesses place this at the end, e.g., Pepsi-Cola Decatur, LLC. Also, keep in mind that different states may have additional restrictions on what names you can choose for your LLC. Check the laws of the state where you want to form your LLC for additional information.

You should also consider doing a name search to ensure your desired company name doesn’t belong to someone else. Many state corporation divisions allow you to do this search online. For example, you can find Washington state’s name search under “Corporation Search.”

What is an LLC, and what is the process for forming one, can vary slightly by state. Generally, you file articles of organization and pay a fee. The good news is that you can do all of this from the comfort of your office by creating your LLC online today.

Legal Disclaimer: This article contains general legal information but does not constitute professional legal advice for your particular situation and should not be interpreted as creating an attorney-client relationship. If you have legal questions, you should seek the advice of an attorney licensed in your jurisdiction.

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