What is an LLC? Pros, cons, and steps on how to form a limited liability company

A limited liability company (LLC) is a popular business structure for many small business owners. It provides limited liability protection, pass-through taxation, and management flexibility. To know if an LLC is right for you, it helps to explore the benefits and limitations of an LLC, steps for creating an LLC, and other key topics relating to LLCs.

This article covers:

• What is an LLC?
• Pros and cons of an LLC
  • LLC advantages
  • LLC disadvantages
• How to create an LLC: Step-by-step guide
• LLC versus other entity types
• LLC state guides
• FAQs
• LLC resource center

Easily form your LLC with BizFilings

What is an LLC?

A limited liability company (LLC) is a business structure that combines the features of a corporation (limited liability, separate legal existence) with those of a partnership (pass-through taxation, management flexibility). Limited liability is where the money that a business owes or losses a business may incur (liabilities) are limited to the amount invested in that business.

Flexible ownership: LLC members (owners) can be individuals, partnerships, trusts, or corporations, and there is no limit on the number of members. S corporations, another popular option for small businesses, are much more restricted in who can be a shareholder. There is also a maximum limit on the number of shareholders in an S corp.

Related: LLC vs. S corporation

Flexible management structure: LLC members can manage the LLC or elect a management group to do so. When an LLC is managed by members (a “member-managed” management structure), the owners oversee daily business operations. When managed by appointed managers (a “manager-managed” management structure), the LLC resembles a corporation, where business management is the responsibility of the directors and officers rather than the shareholders.

Flexible taxation: LLCs typically do not pay taxes at the business entity level. Any business income or loss is "passed-through" to owners and reported on their personal income tax returns. Any tax due is paid at the individual level. In other words, the LLC avoids double taxation because it is not taxed at both the entity level and at the individual level.

Corporations that cannot or choose not to be taxed as an S corporation are taxed at the business entity level and their shareholders are taxed on the income distributed to them. (This type of corporation, which is the default when you incorporate, is known as a C corporation because it is taxed under IRS Subchapter C of the IRC.)

Related: LLC vs. Inc (corporation)

Heightened credibility: Forming as an LLC may help a new business establish credibility, as it is a more formal business structure than a sole proprietorship or partnership. An LLC is created through an official filing with the state. Sole proprietorships and general partnerships, on the other hand, do not require a state filing to exist.

Limited compliance requirements: LLCs face fewer state-imposed compliance requirements and ongoing formalities than corporations (S corporations or C corporations).

LLC disadvantages

There are several perceived disadvantages to choosing an LLC as your business structure. (But in many cases, the advantages outweigh the drawbacks.)

Cost: An LLC usually costs more to form and maintain than a sole proprietorship or general partnership. States charge an initial formation fee. Many states also impose ongoing fees, such as annual report and/or franchise tax fees.

Some compliance obligations. An LLC (as well as an S or C corporation) has ongoing compliance obligations with the state. Examples include maintaining a registered agent and filing an annual report.

Limited ownership transferability. Ownership in an LLC is often harder to transfer than with a corporation. With corporations, shares of stock can be sold by the corporation to increase ownership and, unless there is a shareholder agreement to the contrary, the shareholders can sell their shares to someone else. The ability to buy or sell ownership in the form of stocks without restrictions is one of the reasons why investors prefer C corporations.

Typically, with LLCs, unless the members agree otherwise, all members must approve adding new members or altering the ownership percentages of existing members.

How to create an LLC: A step-by-step guide

LLCs are generally easier to form than a corporation, but there are some administrative and compliance tasks to be done. Although requirements can vary by state, these are the basic steps for setting up an LLC.

Step 1: Choose a formation state for your LLC

You can choose to create an LLC in any state — even if the LLC won’t be doing any business there.

However, many LLC owners choose to form an LLC in the state where they plan to do business. In many cases, this is the state they’re living in. If you form your LLC is one state, but do business in another state, you will have to be registered in both states. (In the second state, you would register as a foreign LLC, aka foreign qualify. You would have to deal with state filings, fees, and compliance responsibilities in two states.

It’s important to note that formation fees, annual report fees, taxation, and LLC laws can vary significantly from state to state, making some states more advantageous for certain small business owners.

Related: Why incorporate in Delaware, Nevada, or Wyoming?, How to select a state for LLC formation, Should I form an LLC for my crypto business?

Step 2: Select a name for your LLC

Each state has different rules on what you can name your LLC.

One of the main requirements is that the name end with a state-approved term or abbreviation indicating that the business is a limited liability company, such as “Limited Liability Company” or “LLC”.

Many states also require that a business name be “distinguishable on the record”. That means the name cannot be too similar to the name of another domestic or qualified LLC or other business entity that is on the Secretary of State’s records. This is important to know since many sole proprietors who wish to convert to an LLC are already operating under a registered “doing business as” (DBA) name or trade name. These owners may want to use their DBA name (along with an LLC signifier) as their legal business name when they decide to set themselves up as an LLC.

To check the availability of the business name you want for your LLC, you should conduct an LLC name search to see whether your desired name is already in use. If you’re not ready to file your LLC formation document, you have the option to reserve the name. For a small fee, states will allow you to reserve a business name for a short period of time.

It’s also a good idea to conduct a trademark search of the name you want to use in order to avoid intellectual property infringement.

Step 3: Choose a registered agent

When starting a new LLC, you are required to have a registered agent in the state of formation. Those registering an existing LLC to transact business in another state will also need to obtain a registered agent in that non-domestic state.

A registered agent, also known as an agent for service of process, receives important legal notices and tax documents on behalf of a business registered with the state. These can include wage garnishment orders, subpoenas, communications mailed by the Secretary of State (such as annual reports or statements), and tax documents sent by the state’s department of taxation. A registered agent must also be available to receive service of process (sometimes called Notice of Litigation). These legal documents are typically a summons and complaint that provide notice that a lawsuit has been filed against the LLC and are the one of the main reasons why states require a registered agent.

While the owner of an LLC can choose to serve as the registered agent for the LLC, there are a number of compelling reasons why business owners will choose a registered agent service provider to assist with this important requirement. Among other things, if the registered agent is not available when time-sensitive documents are delivered, or if the person receiving them mishandles them, this can create serious problems for the LLC. In the case of service of process, improper handing can lead to the costly risk of a default judgement against the LLC. The registered agent must also have a physical address in the state and cannot use a PO Box.

Step 4: Determine the LLC management structure

LLCs offer two management structures: “member managed” and “manager managed”. A member-managed LLC is where all LLC members (owners) participate in running the business. In a manager-managed LLC, the LLC is run by managers who have been appointed by the LLC’s owners.

Some states require that you indicate the management structure of the LLC when filing the formation documents.

Step 5: Draft your LLC operating agreement

An LLC operating agreement is required in nearly every state. While most states allow oral agreements, it is highly recommended that every LLC have a written operating agreement. As the name implies, this document is an agreement among the LLC members (owners) and between the LLC and the members as to how the LLC will be operated. Even if there is only one owner (as with a single-member LLC), it is still important to have an operating agreement. This shows that you respect the LLC’s separate existence (and this can help avoid piercing the veil). An operating agreement also gives you a chance to put in writing what you want to happen in certain circumstances, such as if you can no longer manage the business. It also allows you to override or opt out of certain default provisions of the state LLC statute that might not align with your business needs.

It is particularly important for multi-member LLCs to have a well-drafted operating agreement. This document will clearly spell out the division of ownership, labor and profits, and often heads off disputes among the owners. It should detail, among other things, who has authority to do what, what vote is required to approve certain transactions, how membership interests can be transferred, how new members can be added, how distributions, profits and losses will be split, and more. It is recommended that the operating agreement be reviewed by your attorney to be sure that all the bases are covered.

Related: What is an LLC operating agreement?

Step 6: File your LLC’s Articles of Organization with the state

To make your new LLC exist officially, you must file LLC formation documents with the Secretary of State’s office (or whichever department handles business filings in your formation state). This document is commonly referred to as Articles of Organization, Certificate of Organization, or Certificate of Formation. Filing fees vary across the U.S.

What are LLC Articles of Organization?

While each state’s LLC formation document is different to some extent, there are several common elements. These include the following:

• LLC name, principal location, and purpose of the business
• Registered agent’s name and physical address
• Whether the LLC will be member-managed or manager-managed

Standard forms for the Articles of Organization for an LLC are generally available from each state. The person who formed the LLC must sign the paperwork. In most cases, that person does not have to be a member (owner) or manager. In some states, you must also include the registered agent’s consent to serve as the registered agent for the LLC. Once approved and filed, the state will issue a certificate or other confirmation document. The certificate serves as legal proof of the LLC’s status and can be used to open a business bank account, obtain an EIN, and so on.

Can an LLC be “incorporated"?

Although it is common to hear of an LLC being “incorporated”, an LLC is not a corporation. Technically, the correct way to describe the creation of an LLC (or any entity type other than a corporation) is to say that the business has been “formed” or “organized”. “Incorporation” and Articles of Incorporation are terms that are meant to apply to a corporation (regardless of whether it is taxed as a C corporation or S corporation).

However, “to incorporate an LLC” is generally understood to mean forming an LLC.

What is an LLC publication requirement?

Some states also require that you publish a notice, often in a local newspaper, confirming the formation or registration of the business entity. After publishing the notice, you may then need to file a certificate of publication with the state. Arizona, Nebraska, and New York are states that have a publication requirement for LLCs.

Step 7: Obtain EIN, sales tax ID, and licenses

After establishing the business entity, you should apply to the IRS for an employer identification number (EIN). This is the identification number your LLC will use on all its bank accounts, as well as income and employment tax filings.

In addition, you may need to register with other government agencies and departments. Here is a sample of possible requirements.

• State business tax registration
• Employer registrations
• General business license
• Professional and occupational licenses
• Local permits and zoning approvals
• “Doing business as” name filing

Requirements will vary depending on the state, the local jurisdiction, and the industry you’re in.

Related: What are the legal requirements for starting a small business?

Step 8: Open a business bank account

Opening a business bank account is a best practice for any business. For an LLC, it is essential for keeping business and personal finances separate. This is one of the main factors that courts consider when deciding whether to pierce an LLC’s veil and hold an owner liable for the LLC’s debts. A business credit card can also be used to keep personal and business transactions separate, as well as to help build business credit.

Most banks require company details to open a business account, such as formation date, business type, and owner names and addresses, and EIN.

Related: How to avoid piercing the corporate veil, 10 steps to starting a business

Step 9: Register to do business in other states (if necessary)

If your LLC plans to do business in other states, you will have to register in each of those states. This process is known as “foreign qualification”. (“Foreign” refers to a state or jurisdiction other than your formation state.)

Foreign qualification generally requires filing an application for authority with the Secretary of State. A Certificate of Good Standing from your formation state is often required as well. The LLC will also have to appoint and maintain a registered agent in each additional state.

Many factors are used to determine whether a company is transacting business in a state, and therefore needs to foreign qualify. Some of the common criteria include whether your company -

• has a physical presence in the state
• has employees in the state
• accepts orders in the state

Note that different states have different criteria. To determine whether your LLC needs to foreign qualify in a certain state, it is best to seek the advice of an attorney.

Related: Doing business in another state (Foreign qualification)

LLCs vs. corporations, partnerships, and sole proprietorships

When forming a business, one of the most important steps is deciding on the business structure. There are several business entity options available, with each having significant impacts on a company’s finances, operations, and legal standing.

LLCs vs. C Corps, S Corps, and DBAs: LLCs, C corporations, and S corporations share a few qualities (separate entity status, limited liability protection for owners). But there are major differences when it comes to ownership, taxation, management, and more.

DBA (doing business as) is not a business structure. It is a filing that allows a company to transact business under an assumed or fictitious business name.

Read Understanding C Corp, S Corp, LLC Business Structures and DBA.

LLCs versus S Corps:While the S corporation and LLC both have pass-through taxation, the S corporation lacks the flexibility of an LLC in allocating income to the owners. Additionally, an LLC may offer several classes of membership interest while an S corporation may only have one class of stock.

Read LLCs versus S corporations to learn about other key differences.

LLCs vs. Partnerships and Sole Proprietorships:General partnerships and sole proprietorships are simple to establish and less complex to maintain than LLCs, but they provide no liability protection for the owner’s personal assets.

Read Sole Proprietorships, partnerships ,and LLCs are commonly used entities.

LLC state guides

When forming an LLC, one of the first steps is to choose your formation state.

LLC FAQs

What LLC forms do you need to start a limited liability company?

In order to create an LLC, Articles of Organization must be prepared and filed with the state. This document is sometimes called a Certificate of Organization. Filing fees and any applicable initial franchise taxes or other initial fees must also be paid. If your LLC is formed through BizFilings, all you need to do is complete our LLC forms and we will do the rest. We will prepare and file your Articles of Organization and LLC forms and pay the initial filing fees on your behalf.

Who can form an LLC?

Typically, there are no residency or legal restrictions as to who can start an LLC. However, a few states impose requirements that members and/or managers must be at least 18 years of age, or the age of consent. For more information regarding the requirements of each state, view the LLC Formation Requirements page of our state guides.

Do I need an attorney to form an LLC?

You are not required to have an attorney to form an LLC. You can prepare and file the Articles of Organization yourself. But it’s important that you understand the requirements of your intended state of formation. You can use BizFilings' service to form your LLC and to complete your LLC forms. If you are unsure of what business type is best for you, try our Incorporation Wizard.

What should I name my LLC?

Choosing the name of a new company is an important decision. It’s important to select a name that projects the image you want for your new company. Another recommendation is to select a name that is easy for customers to remember and spell.

Generally, the name you select for your LLC must contain “limited liability company”, “LLC”, or another state-approved term or abbreviation. States often require that the name not be "deceptively similar" to any existing company in that state, or that the name must be "distinguishable on the record" of that state. It is possible that the name you select will not be available in your state of formation or registration — that’s why BizFilings asks for a second choice on our LLC order form.

How many people are needed to form an LLC?

Most states do not restrict LLC ownership, meaning owners can be individuals or other business entities, such as corporations and LLCs. Most states also allow LLCs with one owner, known as single-member LLCs. There is generally no maximum number of owners.

How is a limited liability company (LLC) taxed?

Typically, LLCs with two or more members (owners) are taxed like partnerships. LLCs with only one owner (single-member LLCs) are taxed as sole proprietorships.

LLCs can also elect to be taxed like corporations, where the profits of the LLC are taxed at the business level. The state income tax treatment of LLC profits and losses may or may not mirror the IRS tax treatment depending on the state.

While multi-member LLCs must file an informational tax return, single member LLCs do not. In both cases, the profits or losses are “passed-through” the business and reported on the owners’ tax returns. Any tax due is then paid by the owners at the individual tax level.

LLCs can also elect to be taxed like corporations, where the profits of the LLC are taxed at the business level. The state income tax treatment of LLC profits and losses may or may not mirror the IRS tax treatment depending on the state.

LLCs are also subject to any franchise taxes imposed by the state of incorporation. A franchise tax is a tax imposed for the mere privilege of being an LLC formed or registered to transact business through a process called foreign qualification., (Learn more about doing business out of state.) Franchise taxes are typically due annually, and the amount due differs by state.

How is an LLC managed?

An LLC is owned by its members. Depending on how the LLC is managed, these members can be compared to either partners in a partnership or shareholders in a corporation.

An LLC member will more closely resemble shareholders if the LLC appoints managers to oversee the affairs of the LLC. In this scenario, the members do not participate in management.

If the members are the ones managing the LLC, then the members will closely resemble partners since each member has a direct say in company decision making.

A member's ownership of an LLC is represented by membership interest, just as partners have interest in a partnership and shareholders have stock in a corporation.

Member-management is the normal default rule of state law. This means that if managers are not selected in the Articles of Organization LLC forms, the members will direct the affairs of the LLC.

Related: LLC members vs. LLC managers

Which states have an LLC publication requirement?

A few states require notice to be published in a newspaper that an LLC has been formed. States with this requirement for LLCs include Arizona, Nebraska, and New York. The Published Notice of Formation Service can be added to a BizFilings LLC Formation Service order in each of these states. For New York limited liability entities (Limited Liability Company, Limited Partnership, Limited Liability Partnership), the New York Published Notice of Formation Service can also be purchased independently from BizFilings.

In New York, limited liability entities are required to publish notice of their formation or registration in two New York newspapers and to file proof of publication with the Department of State within 120 days. The publication is made at the county level in two newspapers. Failure to comply with the publication requirement by the deadline results in the suspension of a company's authority to do business in the State of New York.

Does my LLC need a registered agent?

You must appoint a registered agent when you start an LLC in its domestic state, or register to transact business in another state (a process called foreign qualification). BizFilings includes Registered Agent Service with its incorporation and formation service packages.

With our Registered Agent Service, BizFilings satisfies the state's legal requirement to have an individual or company receive important legal and tax documents on behalf of your company. Our service doesn't stop there, however. BizFilings provides a number of advantages at no additional charge to you, such as access to BizComply (our online compliance management tool), electronic Service of Process delivery, online access to your account, and more.

How do I ensure my LLC always has a registered agent?

Our LLC formation service packages include three months of Registered Agent Service. As your registered agent, BizFilings fulfills your state’s legal requirements and provides ongoing compliance assistance for your business. You not only receive our Registered Agent Service for 3 months free with your formation package order, but you also avoid an interruption of this valuable service with our convenient auto-renewal program. For $220 per year, your Registered Agent Service will automatically be renewed to help ensure your company remains in good standing with the state. You also have the option to renew for multiple years and save over the single year price.

How do I get started setting up a limited liability company (LLC)?

After you decide to form an LLC, Articles of Organization LLC forms must be filed, and state and initial fees must be paid. BizFilings' LLC Formation Service packages handle these steps for you. After your LLC forms are filed, it is recommended that your LLC hold an organizational meeting of the members/managers. This meeting will help to start an LLC by adopting an operating agreement, issuing membership interest certificates to members, and undertaking other preliminary matters such as authorizing the opening of a bank account for the LLC. View our article on Business Compliance Requirements to learn more.

How soon will I receive my documents when I select the Rush Filing Service?

The 24- or 48-hour filing time is for the LLC formation only. It typically takes longer for the states to produce the filed incorporation documents. Once BizFilings receives your documents from the state, we will ship them to you via FedEx Overnight delivery. This means you should have your documents in hand anywhere from just a few days to one week after your LLC filing. We will also scan them into our Online Status Center, making them available to you before you receive your original documents to help get an LLC started as quickly as possible.

Note: some states require your signature on the incorporation documents when someone other than BizFilings is acting as registered agent. In these cases, the filing timeframe of 24 to 48 hours begins after we have received the signed documents and received any applicable prior approvals or consent.

What are the different types of LLCs?

Broadly speaking, LLCs can be classified based on their ownership, management, and tax structure.

• Single-member LLC: An LLC with one owner (known as a “member”). By default, a single-member limited liability company is a "disregarded entity" for federal tax purposes. It still provides protection of personal assets. You report the taxable income and the expenses of the business using Schedule C and carry that information over to your personal Form 1040.
• Multi-member LLC: An LLC with more than one owner. A multi-member LLC is treated by the IRS as a partnership for federal income tax purposes, unless it elects to be treated as a corporation.
• Member-managed LLC: An LLC that is managed by its owners.
• Manager-managed LLC: An LLC that is managed by managers appointed by the owner(s).

Certain professionals that require a state license in order to practice (such as doctors, lawyers, and accountants, doctors) may be able form a professional limited liability company (PLLC) . State laws concerning PLLC requirements can vary. Some states can require certain professionals to form a PLLC rather than a standard LLC, while other states do not recognize PLLCs.

There is also the Series LLC, which consists of a parent LLC with one or more separate series established under the parent. Not all states allow the formation of Series LLCs.

What is an LLC operating agreement?

An LLC operating agreement is a contract that outlines the guidelines and details of an LLC. The operating agreement, which is a requirement in most states, and is generally written by the LLC members. BizFilings’ Compliance Kit and Seal service provides template agreements.

Do I need an EIN for my LLC?

Most LLCs will need to obtain an EIN, also as known as a federal employer identification number or federal tax ID number. This is generally true, regardless of whether the LLC has employees.

The exception to the rule is a single-member LLC that does not have employees or an excise tax liability. (But if the single-member LLC plans on hiring employees, or if it will be subject to excise taxes, it will need to obtain an EIN.)

How do I get an EIN for my LLC?

Businesses apply for an EIN (Federal Tax ID number) by preparing Internal Revenue Service (IRS) Form SS-4 and filing it with the IRS. BizFilings can assist with the obtainment of your company's EIN number from the IRS on your behalf. Simply fill out our Federal Tax ID EIN online order form.

How much does it cost to register as an LLC?

The LLC formation and incorporation filing fees vary by state. Our state fee guides provide the filing fee for each state.

More questions about LLCs?

When it comes to how to start an LLC, there is a lot for small business owners to think - from liability and taxes to LLC business management and more. To help you decide which business structure is best for you, try BizFilings’ Incorporation Wizard Tool.

Additional LLC resources

Key issues in selecting formation state: Selecting a state in which to form your business is a significant decision.

Overview of tax implications of LLCs and corporations: There are significant differences in the way LLC s and corporations are charged state fees, as well as how these business entities operate under state law and are taxed by federal and state governments. These factors need to be considered when choosing an organizational form for your business.

LLC electing S Corp tax status: An option you may not know you have: : If you think you can benefit from the combined features of using an LLC to own and operate your small business, and then having it be taxed like an S corporation, evaluate the election of S Corp tax status for your LLC. From double taxation to self-employment tax, this article will identify the key considerations.