This article is part of a larger series on Starting a Business.
An LLC stands for limited liability company. It protects a business owner’s personal assets in the event that legal action is taken against the business. LLCs have the tax advantages of partnerships combined with the limited protection of C-corporations. State fees to register an LLC vary, ranging from $40 in Kentucky to $520 in Massachusetts.
Before starting your business, it’s wise to register it as a legal entity, like an LLC. Doing this will protect your personal assets if a lawsuit were to occur against the business. You can register your business as an LLC through an online legal service. IncFile is an online service that handles and files the paperwork so your business can become an LLC quickly. Start your business today with IncFile for as little as $0 plus state fees with no contracts and no hidden fees.
How an LLC Works
An LLC serves many purposes, but mainly it’s to protect the business owner’s (or owners’) personal assets in the event of a legal or financial issue. Other legal entities, like a sole proprietorship, which is an entity owned by one person, or a partnership, which is a business owned by multiple people, do not provide this protection. For example, if someone were to file a lawsuit against your business and it’s determined that your company is at fault, operating as a sole proprietorship would not protect your personal savings.
Many business owners also enjoy the tax benefits of a limited liability company. LLCs are not taxed at the high 35% rate like C corporations (C-corps), which are legal entities for larger companies that are managed by a board of directors or considering being listed on the stock market. An LLC’s profit is taxed at the personal level, which includes a self-employment tax, federal tax, and state tax.
Additionally, you can elect to have your LLC taxed as an S corporation (S-corp) to take advantage of tax savings. Essentially, part of the profit can be paid as a dividend that won’t be taxed, which may result in thousands of dollars in savings.
To register your business as an LLC, you can use an online legal service, like IncFile, which costs $49 plus the state registration fee. The online legal service takes care of paperwork and can rush the registration to get it approved within 10 days. Typically, it takes a month for the business registration paperwork to be approved by the state. The other way to register your business is to go directly to your state’s official business registration website and walk through the steps yourself.
Before legally establishing the LLC, there are a few requirements. Not all states have the same rules, but typically, you will need an original business name. You must also list a registered agent (business contact), file articles of organization (legal document establishing the business), and pay the fee.
Who an LLC Is Right For
The LLC is a great option for business owners who need flexibility in their business ownership structure. The LLC can be owned by a single member or it can be owned by multiple members. You can create an LLC if you’re not a citizen of the United States or are partnering with someone who is not a U.S. citizen.
Here are businesses an LLC may be right for:
- Single-owner business: To start an LLC, you only need one member, which is the business owner.
- Multi-owner business: If you’re starting a partnership, you can add several members to your limited liability company.
- Foreign national business owner: Someone who is not a U.S. citizen can start an LLC. There are no citizenship or residency restrictions.
- Business with passive owners: There can be several passive owners in an LLC. This is called a Manager-Managed LLC.
- Anonymously owned business: This is a business for which the ownership details are not made public. An anonymously owned business is currently only available for businesses registered in New Mexico.
Even with all of the options above, the majority of businesses are started as single member LLCs. If you’re considering starting an LLC with more than a single member, it’s a best practice to speak to a business attorney. For instance, a multi-member LLC needs to create a thorough partnership agreement to outline what would happen to the business if one were to leave or could no longer work.
LLC Tax Obligations
By law, LLCs must pay a 15.3% self-employment tax. The remaining profit is subject to federal and state tax. The remaining profit is paid to the business owner. Most limited liability companies choose to elect S-corp status to save thousands of dollars on their taxes. Electing S-corp status means that before taxes are applied, a business’ profit is split into an owner’s salary and a dividend. The owner’s salary must be a fair market rate for the industry.
For example, let’s say a business has $80,000 in profit. You pay yourself $50,000 as a general manager. That leaves $30,000 ($80,000 – $50,000) as a tax-free dividend. Your $50,000 salary is taxed at the self-employment, federal, and state (if applicable) levels. Not paying taxes on the $30,000 would save $4,590 in taxes ($80,000 x 15.3% = $12,240; $30,000 x 15.3% = $7,650; $12,240 – $7,650 = $4,590).
How to Start an LLC
Starting an LLC is not complicated, but there are a few requirements you must keep in mind. Most states will take you step-by-step through this process on an official, state-designated website. Additionally, an online legal service, like IncFile, takes you through the same process in a more user-friendly way and submits the paperwork for you.
The first step you must complete to start an LLC is ensure the name for the LLC has not been taken within the state in which it’s being registered. If you try to register the business with a name that is already taken, the state will reject your application. States maintain a database of all active business names. You can search this database to ensure your name isn’t taken before submitting the paperwork.
Most LLCs must name a registered agent, which is the official contact for the business. This contact will receive all communication from the state regarding the LLC. It’s important to name someone responsible because if the business misses the yearly LLC re-filing with the state, it can incur a late fee of several hundred dollars.
Additionally, the articles of organization is a document outlining the basic details about your business and is required when establishing an LLC. States vary with requirements, but most states require the articles of organization to include the business name, registered agent, address of main business location, duration of formation, contact information, and the purpose of the company.
Pros & Cons of Forming an LLC
Even though the LLC is the most popular business structure, it does have drawbacks. Namely, the self-employment tax and an LLC being terminated if a member leaves. Depending on the type of business you own and the number of owners, these drawbacks may cause you to consider an S-corp or a C-corp business structure. Regardless, many of the pros, such as the lack of ownership restrictions and minimal yearly paperwork, make the LLC an attractive option.
Pros of the LLC
Here are the pros of choosing the LLC business structure:
- Limited personal liability: Establishing the LLC separates the owner’s personal liability from business liability. The owner’s personal finances are not at risk if the business has debts or legal action is taken against the business.
- Pass-through taxation: The LLC as a business entity does not pay taxes. The profit is passed on to its members and is simply taxed as personal income. This may result in fewer taxes paid compared to the 35% C-corp tax.
- Minimal yearly paperwork: Unlike a corporation, the LLC doesn’t have to hold an annual meeting of directors and shareholders, adopt bylaws, or keep minutes of all the meetings. The only paperwork required for an LLC is the annual re-filing.
- No ownership restrictions: The fact that the limited liability company allows non-citizens to be an owner makes it appealing to many business owners. If a company has several owners, it’s acceptable if one of them resides in another country.
- Several tax options: The default taxation on an LLC is similar to a sole proprietorship or partnership. However, depending on the income and type of business, the LLC can elect to be taxed as an S-corp or C-corp, which may save money in taxes.
“Like a partnership (or S-corp), an LLC enjoys what is known as pass-through taxation. In other words, each member of an LLC is taxed at an individual tax rate rather than the double taxation felt by a corporation, where first the company is taxed at a corporate rate, and then each shareholder is taxed on his or her holdings. In some states, an LLC must pay a yearly tax that can be almost $1,000. Check with your attorney for further details.”
– Marcus Harjani, Co-founder and COO, FameMoose
Cons of the LLC
Here are the cons of the LLC business structure:
- Self-employment taxes: The default taxation of an LLC includes a self-employment and federal tax Medicare and Social Security) on all profits. It’s best to speak to an accountant or business attorney regarding this.
- LLC termination: Typically, if a member decides to leave the business and therefore the LLC, the LLC is terminated and ceases to exist. Business entity termination does not happen in a C-corp, where members can come and go freely.
- Additional administrative work: To ensure no personal financial liability, an owner’s personal and business finances (income and expenses) must be kept separate. This requires the business owner to open a business checking account.
LLC Registration Providers
When it comes to registering your business as an LLC, there are several different options. Online legal services, like IncFile, LegalZoom, and Rocket Lawyer, charge a fee to handle the paperwork and navigate the state’s business registration website for you. However, you don’t have to use an online legal service. You can register the LLC on your state’s business registration page on your own.
Here are several ways you can register an LLC:
Another option to register your LLC is to do it yourself. Go directly to your state’s official business registration website to start the process.
Frequently Asked Questions (FAQs) About an LLC
This section includes the most frequently asked questions about an LLC.
What is an LLC & how does it work?
An LLC stands for limited liability company. It is a business legal entity that protects an owner’s personal assets if a lawsuit or bankruptcy were to affect the business. Business owners choose the LLC as a legal entity because it provides the tax advantages of a partnership or sole proprietorship with the legal protection of a corporation.
Typically, it costs around $150 to register a business as an LLC, but state fees vary, ranging from $40 in Kentucky to $520 in Massachusetts. A business can register as an LLC through an official state website or by using an online legal services website like IncFile. A company like IncFile will charge a fee to organize the LLC paperwork and submit it on your behalf.
What are the benefits of having an LLC?
There are several benefits of having an LLC versus another business structure. Benefits include limited personal liability, pass-through taxation, minimal yearly paperwork, no ownership restrictions, and several taxation options (such as being taxed as an S-corp or C-corp).
What are the disadvantages of an LLC?
There are a few disadvantages of a limited liability company that you should consider. Disadvantages include having to pay the 15.3% self-employment tax, LLC termination process if a member leaves, and being forced to separate personal and business finances (income and expenses) to prevent personal financial liability.
What is the purpose of an LLC?
The main purpose of an LLC is to prevent business liabilities from affecting the owner’s finances. The sole proprietorship and partnership business structures don’t provide financial protection for the business owner. If a business gets sued as an LLC, the owner’s personal assets are protected. Additionally, the LLC provides a simple ownership structure within the business. A typical C corporation has shareholders, directors, and officers, which can get complicated. However, an LLC only has members.
How do LLC owners get paid?
LLC owners get paid similarly to that of sole proprietorship and partnership owners. A percentage of profit is deducted for self-employment, federal taxes, and state taxes. The business owner gets paid the profit that is left after taxes are deducted. Many business owners also choose to have their LLC taxed as an S-corp, which is another type of business entity. Being taxed as an S-corp means that part of the profit the business earns can be classified a nontaxable dividend, often resulting in thousands of dollars of tax savings.
An LLC is the right legal business entity for the majority of small business owners. The benefit of having personal finances separated from business liabilities makes it very appealing. Additionally, the flexible taxation options, such as electing the LLC to be taxed as an S-corp, can save a business owner thousands of dollars in taxes. The average LLC state registration cost is around $150.
You can easily register your LLC with an online legal service, which is a company that will submit the paperwork for you. Additionally, these companies can serve as your LLC’s registered agent so you never miss the yearly re-filing fee, which can cost hundreds of dollars if you do forget to file. IncFile is one of the most affordable online LLC registration services, with costs starting at $49 plus state fees. Register your business today with IncFile.