What Is an LLC Business: Complete Guide.

When deciding on a legal structure for a new business, many entrepreneurs go with a limited liability corporation, sometimes known as an LLC. An LLC provides you with a number of different taxation alternatives, and it also allows you to have a flexible number of owners. The potential to minimize personal liability in the event that your corporation is sued or declares bankruptcy is, perhaps, the most persuasive argument in favor of forming an LLC. This article will go ahead to discuss an LLC business account and license.

What Is an LLC Business?

A limited liability company (LLC) is a form of business structure in the United States that shields its members from personal liability for corporate debts and obligations. Limited liability companies (LLCs) are a special type of business entity that combines some of the best features of corporations with those of partnerships and sole proprietorships.

While an LLC’s limited liability aspect is similar to that of a corporation, the flow-through taxation that is available to members is more like that of a partnership.

Knowing About LLC Businesses

The limited liability company (LLC) is a legal structure recognized by many jurisdictions. The LLC was developed because business owners wanted a legal structure similar to a partnership. However, this arrangement protected the partners from personal liability for the business’s commitments while providing profits to them (which they declared on their tax returns). Unless the business incorporates, the owner and partners are individually liable for company debts. LLC regulations do not hold individuals personally accountable for business debts unless they have personally guaranteed them with a second mortgage, credit card, or the firm’s assets.

Furthermore, compared to subchapter S corporations, the LLC has several advantages. Whereas an S corporation is limited to issuing a single class of stock, an LLC may issue many classes of stock, each with its own set of privileges. An LLC can have an unlimited number of members, including people, corporations, and partnerships, but a S corporation can only have 75 shareholders (who must be U.S. residents).

Also, when compared to a limited partnership, the LLC offers significant tax benefits. In a limited partnership, a partner’s losses are passive and cannot be subtracted from the partnership’s active income. However, if the partner participates in the management of the firm, he or she assumes personal responsibility for the firm’s obligations. What a frustrating catch-22! In contrast, members of an LLC don’t personally guarantee the obligations of the business and can take advantage of tax write-offs for losses sustained by the legal structure.

In addition, For these two significant benefits, LLC shareholders must pass the “transferability restriction test,” meaning they cannot easily transfer their LLC ownership interests. Large companies cannot use LLCs. Stock exchanges must make company equity transferable to attract big cash. Smaller corporations seldom transfer stock ownership.

Types of LLCs

LLCs can have one member, or multiple members, be managed by one person, or by both the member and the manager.

Members are the people who make up an LLC and have voting rights in its management. Members get an ownership interest in the company by contributing money, often known as “membership interest.” LLCs can be divided into many broad categories based on the number of members and the management style they employ. Below, we’ve detailed the most common LLC types and explained the distinctions between them.

#1. Single-Member LLC/Sole Proprietorship

A single-member limited liability company (LLC) is owned by just one person, as suggested by the name. Like a sole proprietorship, the owner of this business is solely liable for:

Business deals
Taxes
Liabilities owed by the company.

In the absence of formal incorporation, a single-member LLC is treated as a “disregarded entity” and subject to the same taxation rules as a sole proprietorship. LLCs can elect to be taxed like corporations as well.

Forming an LLC business with a single member is the most common and least expensive option. There is also very little paperwork involved.

#2. General Partnership

A general partnership is the optimal type of business structure to use when forming an LLC with several members. This means that all owners are jointly and severally liable for any business debts and taxes. Each partner is responsible for their proportionate share of the business’s taxable income and can vote to sell assets whenever they like.

An LLC can be useful for a startup or growing business. Both general partnerships and restricted partnerships involve a number of people taking on a number of roles. However, a single member is responsible for all obligations. The least culpable party is thus the one left standing.

#3. Member-Managed LLC

When establishing an LLC business, the operating agreement is where the organizational structure is defined. You can choose between having your LLC run by its members or by appointing a manager.

The simplest form of limited liability company (LLC) is a member-managed LLC, which is run by its owners. Each shareholder is fully empowered to make company decisions.

When there are no active participants within the LLC, such as investors, a manager-managed LLC is utilized.

Post a legal need on UpCounsel if you need assistance with LLCs of any kind. Just 5% of all lawyers apply and are accepted into UpCounsel. Lawyers on UpCounsel have degrees from prestigious institutions like Harvard Law and Yale Law and an average of 14 years of professional experience representing or advising businesses like Google, Menlo Ventures, and Airbnb. Also, read IS AN LLC A CORPORATION OR PARTNERSHIP? All You Need

#4. PLLCs

A professional limited liability corporation (LLC) functions similarly to other LLCs, but its scope is confined to specific industries. When states require licenses from regulatory boards for specific professions, professionals in those states must instead form PLLCs. PLLCs are commonly used by professionals like accountants, lawyers, and doctors in these situations.

How to Open LLC?

LLCs offer the same liability protection as corporations at a lower cost and with less administrative overhead. LLC owners can decide how to run the company and how any profits will be taxed. Because of this, it’s a good option for entrepreneurs with limited resources.

Learning the processes of forming an LLC and the considerations you should make along the route is not difficult. Here are some suggestions for getting your LLC off the ground successfully.

#1. Choose a Business Name

Considerations for marketing could be at the forefront of your mind while you brainstorm potential company names. Your company’s name, while crucial for brand recognition, must also be in compliance with applicable laws in your state.

In most cases, state law will not let you use a company name that is already in use by another company in your state. Most jurisdictions also forbid the use of terms that can give the impression that you are engaged in a specific industry, such as insurance or banking. As a result, you’ll probably have to append “LLC” or “limited liability company” to the end of your company’s name.

Visiting the website of the state office responsible for business filings (often the Secretary of State) and conducting a name search might help you check your state’s LLC naming criteria and determine if the name you desire is available.

#2. Pick a Registered Agent

Your limited liability company (LLC)’s registered agent (also called a resident agent or statutory agent) is responsible for receiving legal documents on the company’s behalf, such as lawsuits and subpoenas, and forwarding them to the proper personnel as soon as possible.

Each state has its own rules for who can serve as a registered agent, but in general

The agent must be a resident of the state who is at least 18 years old and who maintains a physical address in the state (the “registered office”)
The agent must be a company authorized to provide registered agent services in the state.

You have the option of serving as your own registered agent in most states, appointing an employee or other person, or using a registered agent service.

It is common practice to choose a local resident as the registered agent for an LLC formed in a state where the business does not have a physical presence. If you run a business out of your home and don’t want your home address listed publicly, if you’re nervous about having legal documents served on you in front of employees or customers, or if you simply prefer the reliability of professional registered agent services, you may want to consider hiring a registered agent.

#3. Create an Operating Agreement for Your LLC Business

A limited liability company’s (LLC’s) operating agreement lays out the rules by which the business will be managed. The operating agreement details the structure of the business, the duties, ownership interests, and contributions of the LLC owners (“members”), the distribution of earnings, and the procedures for accepting new members and handling a member’s departure.

Although operating agreements are not mandated by law, having a well-drafted one can help smooth over disagreements and prevent disputes from escalating. When a corporation is first starting out, its members are more likely to have a common vision for the company, making this the ideal moment to discuss and establish an operating agreement.

The operating agreement is not public. You don’t have to submit it to the state, but you should retain it alongside your other legal documents.

#4. Registration of Articles of Organization

Articles of Organization are filed with the state to formally establish an LLC. The following details are often included in the articles:

The Company’s Official Name
The location of the LLC’s principal office.
What the LLC is for and how long it will last
Whether the members of the LLC, a manager, or neither manage the business.
Information identifying the registered agent and the location of the agent’s principal office
The initials of at least one of the people who created the LLC

Online filing of articles of incorporation is now available in nearly every state. The cost to file a patent application varies by state but is often between $50 and $150 (though there are a few that charge more than $200).

Depending on the state, it can take anywhere from a few days to a few weeks to process the articles of incorporation for an LLC. It’s possible to speed up the procedure in some states for an additional charge. If everything goes smoothly, the state will issue a certificate of formation once your LLC business paperwork has been approved.

#5. Open a Bank Account and a Tax ID Number

The first step in obtaining an IRS Employer Identification Number (EIN) is forming your limited liability corporation. As a person’s Social Security number identifies them for tax purposes on a federal level, so too does your company’s Employer Identification Number (EIN).

An EIN is required if your LLC has any workers or more than one member. For tax purposes, a single-member LLC with no workers can use the member’s SSN, although an EIN may be required to create a company bank account. Having an EIN is another step in keeping your SSN secure.

The IRS provides EINs on its website at no cost to businesses. You can open a bank account for your company’s financial transactions once you have your EIN. Do not combine business and personal funds; instead, maintain a separate business checking account for all business income and expenditures. Keeping your business and personal finances apart is an effective way to safeguard both. If you mix company and personal cash, you could be jeopardizing your personal liability protection.

#6. Acquire the Necessary Licenses and Authorizations

There may be a variety of licenses and permits your company needs in order to legally conduct business in different areas. A few of the more common ones are described here.

The license to sell. A sales tax license or seller’s license is typically required by states when selling taxable products or services. You can now legally collect and remit sales tax to the state thanks to the permit.
A standard license for businesses. A general business or operating license is required by several states for all legally operating firms. A business license is often required by local governments.
Professional permits. Liquor licenses, occupancy permits, and commercial fishing licenses are just some of the many permits and licenses that can be obtained from federal, state, and local governments.
The need for out-of-state registration. You must register as a foreign LLC in every state where your business maintains a physical presence.
DBAs. If you are conducting business under a name other than your legal name, you must register your DBA with the appropriate authorities. There is no need for a DBA if your LLC simply does business under its legal LLC name. However, a DBA must be filed if your company operates under a name other than its legal one. Local jurisdictions have varying rules for filing a change of name (DBA).

If you need help figuring out what kinds of licenses and permits your company will need, contact relevant industry trade associations and local and state government offices.

#7. Consult an Expert and File Your Taxes

It is in your best financial interest to see a tax expert as soon as possible after launching your firm. A certified public accountant (CPA) can give you guidance on the proper tax categorization for your firm, the kind of financial records you should retain, and the tax forms you should file. Account Advising’s corporate accountant Kayla Pea adds, “Having that conversation with an accountant sets things up really nicely” and prevents issues down the road.

The Internal Revenue Service (IRS) does not recognize a separate tax classification for limited liability companies, making them one of a kind. The IRS treats single-member limited liability companies the same as sole proprietorships, or as “disregarded entities.” LLCs with more than one member qualify as partnerships. However, by completing a federal tax election form with the IRS, an LLC can choose to be taxed as either an S corp or a C corp.

Your status as an employee depends on the legal structure of your LLC. If you’re a sole proprietor or a partner in a partnership, your business income and costs will be reported on your individual tax return. Your portion of the business’s profits is subject to income tax and self-employment tax (Medicare and Social Security). To prevent interest and penalties, quarterly estimated tax payments are required. For single-member LLCs, the default taxation system is straightforward, but profitable LLCs can reduce their self-employment tax liability by switching to the S corp taxation system. Read LIMITED LIABILITY COMPANY: Meaning, How It Works, Benefits and Application

What Is an LLC Business Account?

Your LLC business should have its own bank account, which is known as an LLC bank account. In the event of a lawsuit or significant responsibility, being able to demonstrate that you and your business are financially distinct entities will be crucial. In order to keep personal assets separate from business assets, members of an LLC should open a business bank account.

Forming a limited liability company (LLC) has advantages over other business structures, including protection from debt collectors. Members of your limited liability corporation are not individually liable for business debts or obligations. A separate bank account for an LLC helps maintain that distinction between the business and its members. This is crucial in the event that the LLC is ever sued.

If your LLC is sued and its members can’t prove they kept their business and personal finances separate, they may be held personally liable for the debts and liabilities of the business. Having a separate bank account for the LLC business demonstrates that the personal funds of the members are kept separate from the business’s operations. This provides an additional safeguard for the LLC’s participants.

In addition, having separate bank accounts for your business and personal spending makes tax time much less of a headache. If you have an accountant, you can save money on taxes because they won’t need to separate your business and personal funds.

Also, having a company checking account will give you more legitimacy in the eyes of potential partners and clients. If you are converting your business to an LLC from another legal structure, you will need to register a new business bank account in the LLC’s name.

How to Set Up an LLC Business Account

Establish the necessary business account for your LLC. The money in this account will be used for the business’s general accounting needs, including client payments, vendor reimbursements, and operational costs. Consider the following when deciding which type of account is right for your LLC business:

Overdraft protection
Fees
Interest
Minimum balance requirements
Interest
Other factors you find important for your LLC

There is a wide range of business accounts available, from the most basic checking to more advanced options like cash management and round-the-clock assistance. Having a debit card linked to your business checking account can help simplify business spending management.

Find out from a banker what forms of identification and documentation are required to open an LLC account. Before the bank will open an LLC business account, it must first confirm the following details:

The LLC name
The legitimacy of the LLC, including proper licensing information
LLC tax ID number (TIN)
Names of authorized signers

Gather all the paperwork the bank has requested. The names of the necessary documents may vary significantly depending on the state in which your LLC is registered. Here are some examples of the kinds of paperwork that banks require:

Articles of Organization
Business License
Proof of EIN
LLC operating agreement
Fictitious name certificate
Certificate of Formation
Certificate of an assumed name

Typically, an LLC’s account signatories will consist of the LLC’s members or management employed by the LLC. Members of an LLC should appoint authorized signatories and decide who can make withdrawals before agreeing to open an account. If your company’s operating agreement doesn’t identify these individuals, you should do so.

What Is an LLC Business License?

The documentation essential to form an LLC business is commonly referred to as an “LLC license.” A business license is not a prerequisite for forming a limited liability company (LLC), and an LLC does not provide any legal authority to conduct business. As an alternative, an “LLC license” is proof that your business is formally recognized as such by the relevant state authorities.

Articles of organization are the enabling legislation for an LLC. You can officially start doing business as an LLC once this form has been filed with your state. These articles of business can serve as a de facto LLC license. If you wish to open a business checking account, you’ll need to present this paperwork.

Also, a certificate of good standing or equivalent document, if issued by your state, can also be used to demonstrate that your company is legitimate. The website of your state’s Secretary of State may answer any questions you may have about the requirements for obtaining an LLC license and registering your business.

DBA is an abbreviation for “doing business as.” The formation of an LLC is distinct from the filing of a DBA. In reality, in addition to the legal LLC name, your business can register a “doing business as” name.

Do You Need a Business License to Form an LLC?

It has been proven that a separate business license is not necessary for running an LLC, but this is not the case for many other forms of enterprise.

A business license is probably needed to lawfully operate any of these businesses.

Revenue generation. A sales tax license and reseller’s permit may be required if you want to sell tangible goods. These prove that the company is legitimate and authorized to conduct business in the area.
Food service establishments and cooking. Health regulations may apply if you intend to feed a large number of people. This can necessitate the acquisition of a license or permit.
Illegal items. Businesses dealing in alcoholic beverages, tobacco products, guns, and cannabis are often subject to stringent distribution, sales, and tax rules. Also, there may be specialized licensing requirements for some types of enterprises.
Expertise in a specific field. A state or federal agency may mandate professional licensing for occupations like law practice and accounting.
Salons for men’s and women’s grooming. A state board may mandate that you obtain a license to cut hair or nails. Many independent service providers share salon space and need their own company licenses.
Healthcare delivery. Certain professional licenses may be necessary for practitioners in the medical and nursing fields. Even alternative therapies like chiropractic and massage therapy fall under this category.
Construction. If you’re in the building industry, you might require a contractor’s license in addition to any number of other certifications, licenses, and permits. Similar to other fields, the construction industry has fines and other consequences for those who labor without the necessary permits.

Also, keep in mind that this is not a complete list. The formation of an LLC does not necessarily exempt a business from the need to obtain an additional license and permits.

Advantages of an LLC

LLC gives protection and flexibility to a business. The corporate structure appeals to business owners. LLC members are not shareholders.

#1. Flexibility

There are various tax options available to LLCs. They have the option of filing as sole proprietorships, partnerships, S companies, or C corporations depending on their needs and preferences. If the business does not elect to be treated as a C corporation, it will be able to take advantage of this provision and be regarded as a flow-through organization.

Flow-through entities are businesses that pass their profits directly to their shareholders. This means that LLC owners can avoid paying taxes twice on the same income. Income is double taxed if it is subject to taxes both when it is earned by the company and when it is given to shareholders as dividends. Unlike corporations, LLC members are taxed on their personal rather than business income.

If the business elects to be taxed as a partnership, the distribution of income to the partners need not be based on their relative ownership stakes in the enterprise. In the operational agreement, the members make this clear.

To some extent, a company’s operating agreement can be compared to the bylaws of a corporation.

#2. Protection

Similarly to corporations, limited liability businesses enjoy many benefits. The fact that company members are shielded from legal responsibility is the main perk. The corporation is a separate and distinct entity in law. This shields the members and owners of the company from having to pay for the business’s actions or debts out of their own pockets.

A straightforward case in point would be if one of the company’s workers were caught engaging in environmentally illegal activities. The firm may be sued in order to collect damages. In order to collect on the judgment, the court can seize the company’s assets but not the owners’ personal wealth. The only exception would be if the owner actively encouraged the criminal behavior.

Conclusion

In conclusion, LLC is a useful business structure. With limited liability, business obligations, and assets are kept separate from the owners’ individual ones. In the event of a company’s bankruptcy, creditors are limited to the assets of the company itself and not the owners personally. There are a number of advantages to forming an LLC, including reduced administrative burden and easier taxation. Additionally, this is one reason why LLCs dominate the American corporate landscape.

Frequently Asked Questions

Who owns a limited liability company?

Members are the common term for LLC owners. Articles of Organization must be issued to the state in order to establish a limited liability company, which is a legal business structure. The formation of an LLC is less cumbersome than that of a corporation, and its members enjoy greater freedom and security.

What is the LLC number?

A Limited Liability Company (LLC) and its Responsible Party are each given a unique identifier known as an LLC number, Federal Tax ID Number, or Employer Identification Number (EIN), regardless of whether the LLC has a single or numerous owners.