An LLC is a limited liability company. The word "limited" in this context means that the members of the LLC have limited liability for the company's debts and obligations. This means that if the LLC cannot pay its debts or obligations, the creditors cannot go after the personal assets of the LLC's members.
An LLC is similar to a corporation, but there are important differences. A corporation is an incorporated entity, and to incorporate it, you must have a state-issued business license and federal tax identification number. A limited liability company has fewer rights and protections, so the members do not have liability for debts or obligations.
You do not need to incorporate an LLC. You can incorporate without incorporating the LLC. However, incorporation is the best way to minimize the liability that a business could incur as a limited liability company.
When Is An LLC A Good Idea?
Most businesses have limited liability. That is, if the company cannot pay its debts, the business is not on the hook for those debts.
One of the big advantages of having an LLC, compared to a sole proprietorship, is that you can delegate authority to other members of the LLC to act on your behalf. For example, you can hire someone else to manage the bookkeeping. In general, there are many ways to delegate authority, but it's best to discuss these issues with a CPA, a business attorney, or your accountant.
For this discussion, we're focusing on limited liability companies. Any LLC can have a limited liability company. A sole proprietorship can be an LLC. A partnership can be an LLC. There is no limit on the number of members in an LLC.
When you have an LLC, the members of the LLC are not responsible for any debts or liabilities of LLC. The LLC itself is completely separate from the individual members.
Many business owners are reluctant to form an LLC because they think of it as a single entity. But an LLC can be set up in one or more separate sections of the state. If one of those sections chooses to terminate the LLC by filing a quitclaim deed, the LLC can end up being legally considered just a collection of individuals rather than a legally separate business entity.
An LLC may also require a larger initial investment in start-up costs since it requires an LLC to hire lawyers and other professionals. The initial cost is reduced by the fact that many business professionals already provide LLC services on a fee-only basis, usually by establishing an LLC under the state's standard agreement for professionals, or SEPA.
If you want to establish an LLC and your lawyer tells you that you do not need a Limited Liability Company, you are probably being scammed. According to the National Association of Secretaries of State, about 1 in 3 business entities in the United States is an LLC. An LLC may help protect your assets, but some legitimate and some not so legitimate companies offer to create LLCs for your startup and do not tell you that it is just a pyramid scheme. It's a scam to get you to pay money upfront. The best way to protect yourself is to take the time to understand what this company is offering before you agree to sign a contract.