What is a Limited Liability Company and How Does It Work?

what is a limited liability company and how does it work

“What is a limited liability company and how does it work?” This is a question  people often ask when they’re comparing an LLC with a corporation. If you want to scale down on the process of setting up your business, choosing an LLC is a good choice. Not only will you save on taxes, you’ll also protect your personal assets such as your home and car.

Read the following content to get a better idea of why this type of business entity is popular among both older and newer companies, especially companies that are newly established or are in the first stages of growth.. 

what is a limited liability company and how does it work

What Is a Limited Liability Company and How Does It Work for Small Businesses?

To learn more about the benefits and disadvantages of this type of business entity, again, you should first answer the question, “What is a limited liability company and how does it work?”  LLC is stands for Limited Liability Company – a legal entity that separates your business from what you own personally.

Asset Protection for Individuals

The purpose of forming an LLC is to safeguard the owner’s personal assets, such as his or her home, vehicle, and bank account. Therefore if the owner is sued, his or her assets are protected. This fact alone is one of the most significant advantages of forming an LLC.

Speaking the Language

Establishing an LLC is critical to your startup company’s success if you wish to preserve your personal assets. When forming an LLC then, you need to make sure you speak the language.

Some individuals mistakenly assume that LLC stands for Limited Liability Corporation. This isn’t true. An LLC is a business entity, not a corporation. It is set up so the members own the company. The entity is not overseen by a board of directors.

LLCs are also not double-taxed like corporations (on both earnings and share dividends).

Therefore, you  can incorporate a business, but you cannot “LLC” a start-up. This entity is like a partnership or sole proprietorship with its own characteristics and features. 

Again, setting up an LLC covers you financially and saves you from unwanted lawsuits – lawsuits that can affect your personal finances and lifestyle.

Why It’s a Good Idea to Set Up a Limited Liability Company

When answering the question, “What is an LLC business?” it’s important to distinguish between an LLC and corporation. These distinctions are one of the benefits gained through the formation of the entity.

LLCs versus Corporation – The 3 Main Differences

  1. Unlike corporations, LLCs do not elect a board of directors.
    2.  LLCs do not have board of director meetings.
    3. LLCs are not required to retain meeting minutes and are not subject to double taxation. 

An LLC benefits from pass-through taxation. The owner pays taxes from his business on his or her individual  tax return, just like a single proprietor or a partnership would.

Does It Cost A Lot to Set Up a Limited Liability Company?

This entity is easy to form and set up and does not cost you a great deal to do so. You’ll pay $50 to $300, on average, depending on where your LLC is established.

By taking the time to set up an LLC, you can save you a great deal of legal or financial troubles down the road.  After all, it costs a lot more money to lose your car and home  if you and your business are sued and you’re not protected from financial liability.

Creating a Maintenance Plan for Your LLC

Once you establish an LLC, you’ll need to make sure you maintain it, or create a maintenance plan so it stays compliant with your state’s LLC’s rules and regulations. Therefore, one of the things you’ll need to do is to submit an annual report to the Secretary of State (SOS).

All requested LLC paperwork should go through the Secretary of State’s office in the state where you form your LLC. You’ll also need to file an address change in case you relocate. Following these processes is necessary if you don’t want the state to shut down your company.

How to Get the Set-Up Started

To create an LLC, you must first complete the following:

  1. Come up with a name for your LLC. To make sure it hasn’t been taken, look it up in the state’s database.
  2. Draft the Articles of Organization, also called a Certificate of Formation. 
  3. Choose a registered agent to handle your LLC’s formal correspondence and mail. 
  4. Submit the LLC paperwork to the Secretary of State’s office.
  5. Pay the filing fee to the state.
  6. Wait for approval (this usually takes several business days).

After You Set Up Your LLC: What Is Next?

After your LLC is set up, you’ll need to do the following:

  1. Establish an LLC Operating Agreement – this will outline how you will administer your LLC. You don’t have to submit this form to the SOS. Instead, it should be kept in-house for your new business.
  2. Obtain  a Federal Tax ID Number for the LLC, also known as an employer identification number or  EIN. You need an EIN to file your company’s taxes and open a business bank account.
  3. Draft and submit an annual report.

What Is LLC Business Assurance?

LLC business assurance guarantees your protection from business-related lawsuits that go after your personal assets. Therefore, an LLC business gives you this assurance. You don’t receive this type of protection if you establish a partnership or sole proprietorship.

Benefits of an LLC

The benefits associated with an LLC include the following:

  1. Protection of personal assets
  2. The ability to own property, such as real state or an aircraft
  3. The ability to enter into business contracts 
  4. The ability to sue other companies
  5. The flexibility of opening and using a business bank account
  6. Reductions in taxation

The Main Drawback of Setting Up an LLC

The main drawback of forming an LLC has to do with unemployment and payroll taxes. You may have to pay unemployment compensation to yourself or another employee when you set up an LLC. Also, you are responsible for payroll taxes when you set up this entity.

An LLC – Determining If It’s Right for You

If you’re wondering if an LLC is right for you, you only have to look at the benefits. Not only are you protected financially, the entity allows you to work separately as a bona fide business.

Who to Contact about Setting Up a Limited Liability Company

Contact the Corporation Center for more details about forming a limited liability company now. Call 800-580-4870 today.