When you’re setting up a small business, you’ll have multiple options for the type of company structure that you can establish. One of the most common ones is a Limited Liability Company (LLC).

What exactly is an LLC?

It’s a hybrid company that has features of both Partnerships and Corporations. They have the flow-through taxation feature of partnerships and the limited liability protection of corporations. Additionally, they can have an unlimited number of members who can be individuals, LLCs, or corporations.

Advantages of LLCs

LLCs are inexpensive and easy to form. You can establish them in all 50 states by filing LLC Articles of Organization with the state. The limited liability offered by them means that the members are not personally held liable for debts taken on by the LLC.

The LLC exists as a separate entity, which is why it requires a unique Federal EIN/Tax ID Number from the IRS, as well as the state requirements.

You can also select different types of profit distributions and it doesn’t need to be 50-50. It’s also easy to maintain the company as you don’t need any formal meeting records or resolutions.

Taxation is favorable for LLCs too. Unlike the entities of Corporations or S-Corps, LLCs do not have double taxation, one tax for the entity itself, and again at the individual level. All the income “flows through” to members’ from the company’s personal tax return as an individual. It also provides you with an option to be taxed as an S-Corp.

While there are many advantages of LLCs, they do have some disadvantages too.

Disadvantages of LLCs

Firstly, one disadvantage of LLCs is that they don’t last forever, unlike corporations. When a member dies or the company goes bankrupt, the LLC is dissolved.

While LLCs are easier to form and maintain, it’s simpler to have a sole proprietorship or a partnership firm. This is because LLCs require you to do federal and state-level filings. You also need to pay the state filing fees when you set up your company and every year after that.

Also, if you intend to go public, have investors, or want to issue employee shares, LLCs may not be the best option for you.

How can you form an LLC? Let’s find out.

Forming an LLC

To establish an LLC, you need to obtain an LLC EIN Number from the IRS, and file Articles of Organization with the Secretary of State. These filings can be done by you, a lawyer, or a professional filing service like GovDocFiling which is the simplest and most affordable option.

You also need to create an operating agreement and pay the fees for filing the articles. The operating agreement must outline all of the financial and functional decisions of your business.

To learn more about LLCs and how GovDocFiling can help you with them, check out this infographic below.

The Essentials Facts of LLCs You Need to Know as a Small Business Owner

Image Courtesy: GovDocFiling