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What is an LLC

What is an LLC?

LLC stands for Limited Liability Company. It’s a business structure formed under specific state statutes. It is a separate legal entity from its owners (known as “members”). An LLC can be either a single-member LLC or a multi-member LLC and either member-managed or manager-managed.

Forming your business as an LLC helps to protect you against lawsuits, significantly cuts down on paperwork compared to other business types, prevents your business from being taxed twice, and helps to present your business as more credible.

The LLC is the formal business structure that is simplest to form and maintain. It offers some of the same benefits of a corporation—without the costs and compliance complexity. Business owners that are looking for personal liability protection, tax flexibility, and management options may find that forming an LLC (Limited Liability Company) will be an ideal choice for their company. Also, the structure of an LLC is flexible.

A limited liability company (LLC) combines elements of a partnership, sole proprietorship and a corporation. Consider your type of business, personal assets and liability risk when deciding whether to form an LLC.

Limited liability means that its owners, also called members, are usually not personally responsible for the LLC’s debts and lawsuits. If an LLC files for bankruptcy, the members do not have to use personal money to pay the company’s debts. If the LLC faces a lawsuit, the members do not risk losing their home to cover a settlement.

In the eyes of the IRS, however, LLC taxes usually resemble a sole proprietorship or partnership. The LLC does not pay income taxes itself; instead, the owners list business profits and losses on their personal tax returns. The LLC can choose to tax itself as a corporation. To do so, it must follow corporation tax law and filing requirements.

LLC owners must file formal documents with their state, pay a filing fee and comply with other regulations. In some states, LLCs have to pay an additional franchise tax. Partnerships and sole proprietors don’t face the same level of paperwork and fees. Unlike a corporation, an LLC does not issue stock and is not required to hold annual meetings or keep written meeting minutes.


An LLC is just one of several business structures. Other common examples include:

– Corporation
– General Partnership
– Sole Proprietorship


Unlike other business structures, LLCs can choose among three different ways of paying income tax. One popular option is to be taxed as an S-Corp. Technically an S-Corp is just a tax designation, not its own type of business entity.

For most small businesses, LLCs offer the right mix of personal asset protection and simplicity. Unlike sole proprietorships and general partnerships, LLCs can protect your personal assets if your business is sued. Unlike corporations, LLCs are relatively easy to form and maintain, and are not subject to double taxation.

LLCs also offer the easiest way of choosing the S-Corp tax designation, because they are simpler to maintain than a standard C-Corp.

LLC comparison chart

Advantages of Starting an LLC

There are several advantages to creating an LLC, but here are a few that stand out.

Pass-through taxes.
There’s no need to file a corporate tax return. LLC owners report their share of profit and loss on their individual tax returns, meaning you avoid double taxation. In a C-Corporation, profits are subject to “double taxation”: profits are taxed before being distributed to owners and taxed again when owners report their share of profits on their individual tax returns.

No residency requirement.
Those who an LLC need not be U.S. citizens or permanent residents.

Legal protection.
Creating an LLC gives you limited liability for business debts and obligations.

Enhanced credibility.
Partners, suppliers, and lenders may look more favorably on your business when it’s an LLC.

Personal Asset Protection
Provided there is no fraud or criminal behavior, the owners of an LLC are not personally responsible for the LLC’s debts or lawsuits.

LLC are relatively easy to form and maintain with little paperwork. Unlike C-Corporations and S-Corporations, LLCs are not required to assign formal officer roles, hold annual meetings, or record company minutes and resolutions.

There are few restrictions on how you can structure the ownership and management of an LLC. Your LLC can be single member or multimember; it can be managed by its members or by managers who are appointed by the members. In addition, an LLC can elect to be taxed as a C-Corp or S-Corp if that is more beneficial.

Increased Credibility
Forming your business as an LLC brings added credibility. An LLC is recognized as a more formal business structure than a sole proprietorship or partnership. Including LLC in your business name lets customers and partners know that you are a serious business.

Access Business Loans
Once you have formed an LLC, your business can begin building a credit history. This will help your business access loans and lines of credit.

..How to Create an LLC (Limited Liability Company):

1- Choose a legal name and reserve it, if the Secretary of State in your state does that sort of thing (not all do).

2- Draft and file your Articles of Incorporation with your Secretary of State.

3- Decide who will run the business (managers or members).

4- Decide how many owners will be part of the LLC.

5- Apply for a business license and other certificates specific to your industry.

6- File Form SS-4 or apply online at the Internal Revenue Service website to obtain an Employer Identification Number (EIN).

7- Apply for any other ID numbers required by state and local government agencies. Requirements vary from one jurisdiction to another, but generally your business most likely will be required to pay unemployment, disability, and other payroll taxes – you will need tax ID numbers for those accounts in addition to your EIN.

Disadvantages of Starting an LLC

Creating an LLC is an attractive option, but there are a few hurdles.

Limited growth potential.
LLC owners cannot issue shares of stock to attract investors.

Lack of uniformity.
An LLC can be treated differently in different states.

Self-employment tax.
LLC earnings can be subject to this kind of taxation.

Tax recognition on appreciated assets.
This could happen if you convert an existing business to an LLC. One more way that extra taxation can occur.

Who Manages the LLC?

Generally, an LLC is managed by its members, known as member-managed. However, in some cases, members will appoint a manager to handle the LLC’s daily operations, and this is called manager-managed.

The membership of an LLC and the way it will be run are laid out in a legal document known as an operating agreement. This is an internal agreement among all the members of the LLC.

Types of LLCs

All LLCs offer the same features that make them a unique hybrid of other business entities: limited liability and pass-through taxation. However, some LLC types work best for a particular business scenario. Here are the most common types of LLCs:

• Domestic LLC
• Foreign LLC
• Professional LLC
• Series LLC

Converting to an LLC?
If you already have a sole proprietorship or partnership, you can convert to an LLC anytime. The tax structure does not change, but you will have some paperwork to work with. In some states, a business owner only has to fill out a certificate of conversion. Other states require Articles of Organization just like starting an LLC from scratch. In all states, you will have to transfer your federal and state employer identification numbers, sales tax permit, business license and any professional licenses to the name of your new LLC.

Although the LLC definition involves many levels of consideration, protection of personal assets is key. An easy way to define LLC is to think of the flexibility of a sole proprietorship or partnership combined with the protection of a corporation. For the right business, this could be the best of both worlds.

If you’re starting a business and want to form an LLC, we can help. Starting an LLC through Castillo Tax Service is fast and affordable. Begin the process by answering a few simple questions. We will assemble your LLC documents and file them directly with the Secretary of State and you’ll receive your completed LLC package by mail.

It's a Social Media and digital marketing consultant and owner and founder of He is also author and entrepreneur. He helps small businesses to grow, get clients and generate income.

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