1. What is an LLC?
A limited liability company, commonly called an “LLC,” is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation.
Like owners of partnerships or sole proprietorships, LLC owners report business profits or losses on their personal income tax returns; the LLC itself is not a separate taxable entity. Like owners of a corporation, however, all LLC owners are protected from personal liability for business debts and claims — a feature known as “limited liability.” This means that if the business owes money or faces a lawsuit, only the assets of the business itself are at risk. Creditors usually can’t reach the personal assets of the LLC owners, such as a house or car. (Both LLC owners and corporate shareholders can lose this protection by acting illegally, unethically, or irresponsibly.)
For these reasons, many people say the LLC combines the best features of the partnership and corporate business structures.
2. How many people do I need to form an LLC?
You can form an LLC in any state with just one owner.
3. Who should form an LLC?
You should consider forming an LLC if you are concerned about personal exposure to lawsuits or debts arising from your business. For example, if you decide to open a store-front business that deals directly with the public, you may worry that your commercial liability insurance won’t fully protect your personal assets from potential slip-and-fall lawsuits or claims by your suppliers for unpaid bills. Running your business as an LLC may help you sleep better, because it gives you personal protection against these and other potential claims against your business.
Not all businesses can operate as LLCs, however. Businesses in the banking, trust, and insurance industry, for example, are typically prohibited from forming LLCs. In addition, some states, including California, prohibit professionals such as architects, accountants, doctors, and licensed healthcare workers from forming LLCs.
You can also get limited liability for your business by forming a corporation. For information on the differences between these two business structures.
4. How do I form an LLC?
In most states, you create an LLC simply by filing “articles of organization” with your state’s LLC filing office (which is usually part of the secretary of state’s office) and paying a filing fee. A few states refer to this organizational document as a “certificate of organization” or a “certificate of formation.” Most states provide a fill-in-the-blank form that takes just a few minutes to prepare. You can obtain the form by mail or download it from your state’s website (check your state’s secretary of state or corporations division home page).
A few states impose an additional requirement: Prior to filing your articles of organization, you must publish your intention to form an LLC in a local newspaper.
You’ll also want to prepare an LLC operating agreement, though it isn’t legally required in most states. Your operating agreement explicitly states the rights and responsibilities of the LLC owners. The main reasons to do this are to clarify your business arrangements and to decide how your LLC will be run. If you don’t create a written operating agreement, the LLC laws of your state will govern the inner workings of your LLC.
5. Do I need a lawyer to form an LLC?
No. All states allow business owners to form their own LLC by filing articles of organization. In most states, the information you must provide for the articles of organization is very basic — typically, you have to supply the name of the LLC, the location of its principal office, the names and addresses of the LLC’s owners, and the name and address of the LLC’s registered agent (a person or company that agrees to accept legal papers on behalf of the LLC).
Now that most states provide downloadable fill-in-the-blank forms and instructions, the process is even easier. And LLC filing offices are becoming more accustomed to dealing directly with business owners; they often allow business owners to email questions to them directly