What an LLC is and how to establish one

 

Starting your own business comes with big decisions — including how to structure it. A limited liability company, or LLC, is one of the most popular choices for new business owners because it offers personal liability protection, flexible tax options and a relatively simple setup process. Let’s take a closer look at how an LLC works and walk through the key steps to form one, so you can move forward with confidence.

 

What is an LLC business?

A limited liability company (LLC) is a business structure that blends elements of both corporations and sole proprietorships. It’s designed to give small business owners the liability protection of a corporation without the complexity of corporate formalities. In other words, LLCs help keep your personal possessions and accounts separate and protected from your business obligations. LLCs are flexible, relatively easy to form and widely used across industries — from solo freelancers to growing startups. So how does an LLC work? Here are few of the components:

 

Liability

LLCs limit the personal liability of their owners, known as members. This means that in most cases, members aren’t personally responsible for the company’s debts, lawsuits or obligations. The LLC is considered a separate legal entity from its owners.

 

Ownership

LLCs can be owned by a single individual or multiple people or entities. There’s no limit to the number of members, and ownership can include individuals, corporations or even other LLCs. Members can manage the business themselves or appoint a manager to run daily operations.

 

Taxes

By default, LLCs are taxed as pass-through entities, meaning that profits and losses are reported on the personal tax returns of the members. However, LLCs can also elect to be taxed as a C corporation or an S corporation, depending on what’s most beneficial for their financial strategy.

 

Operating structure

Unlike corporations, LLCs aren’t required to follow rigid management structures or adopt formal bylaws. Instead, an operating agreement outlines how the business will be run, how decisions will be made and how profits will be distributed.

 

Steps to establish an LLC

Starting an LLC is a manageable process, but it does involve a few important steps. Here’s how to get your LLC up and running:

 

1. Choose a state

You can form an LLC in any state, but many business owners choose their home state to simplify taxes and compliance. If you operate in multiple states, you may need to register as a foreign LLC in each one.

 

2. Name your LLC

This is usually the fun part. Pick a company name that’s unique and complies with your state’s naming rules. Most states require including “LLC” or “Limited Liability Company” in your business name.

 

3. File articles of organization

This official document registers your LLC with the state. You’ll typically submit it to the secretary of state and pay a filing fee.

 

4. Create an operating agreement

This internal document outlines how your LLC will be managed, how decisions will be made and how profits and responsibilities will be divided.

 

5. Obtain necessary licenses and permits

Depending on your industry and location, you may need local, state or federal licenses to operate.

 

6. Comply with tax and regulatory requirements

Get an employer identification number from the IRS, register for state taxes if needed and understand your ongoing tax obligations.

 

LLC advantages for small business owners

Forming an LLC comes with a range of benefits that make it especially attractive for entrepreneurs and small business owners. Here’s how those structural features translate into real-world advantages:

 

Protects your personal assets

Because an LLC separates your personal and business liabilities, your personal assets are generally protected if the business faces debt or legal claims. This creates a safeguard between your business risks and your personal finances that can be challenged only if the business is not operated correctly or if you personally guarantee its debts.

 

Simplifies taxes

The default pass-through tax model for a sole proprietorship or a partnership helps many small business owners avoid double taxation. And if another tax treatment makes more sense as your business grows, you also have the option to elect S corp or C corp status.

 

Reduces administrative burden

Compared with corporations, LLCs require less paperwork and fewer ongoing formalities. This means fewer meetings, filings and compliance steps — freeing you to focus on running your business.

 

Builds credibility with customers and partners

Operating as an LLC can make your business appear more established and trustworthy. The “LLC” designation can reassure clients, vendors and lenders that your business is legitimate and professionally managed.

 

Gives you flexibility in how you run your business

Whether you want to manage the business yourself or bring in outside managers, an LLC gives you options. You can also define roles, responsibilities and profit distribution through your operating agreement.

 

Drawbacks of an LLC for small business owners

While LLCs offer many advantages, they’re not the right fit for every business. Here are a few potential drawbacks to consider before forming one:

 

Self-employment taxes can be higher

Unless your LLC opts for corporate tax treatment, members are typically subject to self-employment taxes on their share of business income. This includes both the employer and employee portions of Social Security and Medicare taxes.

 

Varying state fees and requirements

The cost and complexity of forming and maintaining an LLC can vary widely, depending on the state. Some states charge high annual fees or impose additional compliance obligations that can increase your administrative workload.

 

Limited ability to raise venture capital

Unlike corporations, LLCs can’t issue stock. That can make it harder to attract investors, especially venture capital firms that prefer the structure and predictability of corporations.

 

More paperwork than a sole proprietorship

Although LLCs are simpler than corporations, they still require more setup and maintenance than sole proprietorships. You’ll need to file formation documents, create an operating agreement and keep up with ongoing state requirements.

 

Set your LLC up for success

Deciding on the structure of your business is just one of the first steps. As a small business owner, you’ll also want to explore financial solutions that make sense for your business, such as business checking and business savings accounts or business loans. To learn more about what you may need and discuss your options, talk with a Chase business banker.

 

FAQs about LLC businesses

 

How much does it cost to start an LLC?

The cost to start an LLC varies by state but typically ranges from $50 to $500 for filing the articles of organization. Additional costs may include business licenses, permits and annual fees.

 

What do I need to start an LLC?

To start an LLC, you’ll need a business name, a registered agent and formation documents filed with your state. Most states also recommend or require an operating agreement.

 

What is needed to maintain an LLC?

Maintaining an LLC usually involves filing annual reports, paying state fees and keeping business finances and operations separate from your personal ones. You may also need to renew licenses or permits regularly.

 

Can I form an LLC in a state I don’t live in?

Yes, but you’ll likely need to register as a foreign LLC in your home state if you conduct business there. This can lead to extra paperwork and fees, so weigh the pros and cons carefully.