40 FAQs with All You Need to Know About Filing an LLC
Filing an LLC (Limited Liability Company) provides small businesses with some of the advantages of incorporating (starting a corporation) while preserving simplicity through minimal compliance formalities. I’ve assembled a comprehensive list of FAQs about the LLC so that you can learn more about the potential benefits, LLC filing requirements, and more.
Keep in mind that you have much to consider when choosing a business structure. These LLC FAQs are not legal, accounting, or tax advice. For guidance on whether an LLC or another business entity type will be the best option, business owners should consult their attorney and accountant or tax advisor.
1. What Is a Limited Liability Company (LLC)?
The LLC structure combines the advantages of a corporation and those of a general partnership or sole proprietorship. An LLC can be a single-member LLC or a multiple-member LLC. Forming an LLC limits member (owner) liability while requiring less paperwork and fewer formalities than a corporation.
An LLC’s taxes are handled as they are for a partnership (or sole proprietorship), with all income flowing through to members and reported on their personal tax returns. Alternatively, an LLC may elect to be taxed as a C Corporation or as an S Corporation.
The LLC structure also provides management flexibility. It can be member-managed, in which owners handle the day-in-day-out management responsibilities. Or an LLC can designate a person (or persons) as a manager(s), which is called a manager-managed LLC. By default, most states will consider an LLC “member-managed” unless the formation paperwork specifies that it should be “manager-managed” LLC.
An LLC can benefit from an LLC Operating Agreement, particularly when manager-managed or when it has multiple members. An LLC Operating Agreement describes the authority and responsibilities assigned to the individuals involved in the business.
2. Why Would Someone Want to Form an LLC?
A Limited Liability Company is a business structure formed under specific state statutes. It is a separate legal entity from its owners (known as “members”).
The LLC business structure offers some of the same benefits of a corporation—without the costs and compliance complexity. Business owners looking for personal liability protection, tax flexibility, and management options may find that forming an LLC will be a good choice for their company.
3. What Are the Benefits of Forming an LLC?
Forming an LLC is an attractive option for business owners who want liability protection with minimal formality. Often, entrepreneurs from other countries embrace the LLC structure. Even an individual who is not a U.S. citizen may be an LLC member. LLC members may also be another entity (such as a C Corp, S Corp, another LLC, a trust, or an estate).
Simplicity
Next to operating a business as a sole proprietor or general partnership, the LLC structure is the least complex and less costly form of business entity to start and maintain from a state compliance perspective. The business registration paperwork to form an LLC is minimal, as are the ongoing filing requirements.
Personal Liability Protection
In an LLC, the owner’s personal assets are shielded from business liabilities just as they would be in a corporation. Because an LLC is considered a separate legal entity from its members, its financial and legal responsibilities are also it’s own. So, if someone sues the business or the company cannot pay its debts, the LLC members are typically not held personally responsible. Therefore, their personal assets are at lower risk of being seized to pay legal damages or settle debt than if the business were a sole proprietorship or partnership.
Tax Treatment Options
By default, the IRS views an LLC as a “disregarded entity” for tax purposes. As such, income tax is applied in the same way as it is to sole proprietorships and partnerships—with business income and losses passed through to its members’ tax returns and subject to members’ individual tax rates. Thus, an LLC does not file separate taxes.
An LLC has other tax treatment options, too. Members can opt for an LLC to be taxed as a corporation (filing IRS Form 8832), with profits taxed at its corporate rate. Or, members of an LLC can choose the S Corporation election (by filing IRS Form 2553). S Corp election allows for the LLC to have pass-through taxation but with the corporate benefit of a reduced self-employment tax burden. LLC members only pay Social Security and Medicare taxes on their income taken as salaries; members’ dividend income is not subject to self-employment taxes.
Management Flexibility
An LLC may be either member-managed or manager-managed. In a member-managed LLC, the owners handle the day-to-day management of the business. In a manager-managed LLC, members appoint one or more managers to manage the company. In most states, an LLC can appoint members of the LLC to be managers or hire someone else to do the job. The manager(s) of an LLC usually have the authority to make certain decisions and run the day-to-day operations of the company. With a manager handling daily responsibilities, the LLC members retain authority over more significant strategic matters. Most states consider an LLC to be member-managed unless the formation paperwork indicates it should be manager-managed.
4. What Are the Potential Disadvantages of Forming an LLC?
One disadvantage of the LLC structure is the inability to issue stock to raise capital. However, many LLCs can raise capital by issuing shares of membership, to the extent allowed in the LLC’s Operating Agreement.
Also, while requirements are minimal compared to operating a corporation, LLC members have more compliance rules to follow than owners of sole proprietorships and partnerships.
5. What Is an LLC Member?
An LLC member is a person or entity who is an owner of some or all of an LLC. Unless the LLC’s Articles of Organization specify managers will control the company, the members make all business decisions.
6. What Is an LLC Manager?
An LLC may be operated by a manager or group of managers who act much like a corporation’s board of directors. LLCs must outline in their Articles of Organization whether the LLC will be member-managed or manager-managed.
7. Can One Person Form an LLC?
Yes, all states allow single-member LLCs. There is also a multiple-member LLC.
8. What Is the LLC Organizer?
An LLC organizer is the person (18 years of age or older) or entity that prepares, signs, and files an LLC’s Articles of Organization with the state.
9. What Are Articles of Organization?
The Articles of Organization is a document that must be filed with the appropriate state agency to create a Limited Liability Company. It includes basic information about the LLC as required by state law. Sometimes states refer to the document as a Certificate of Organization.
10. Does an LLC Have Stockholders?
No. LLCs are not permitted to issue stock in any state. Only corporations may issue stock.
11. What are Membership Interests in an LLC?
A member’s ownership of an LLC is represented by “interests,” Just as a partner has an interest in a partnership and shareholders own stock in a corporation.
12. How Is an LLC Structured?
An LLC may have one or more members. Members are the owners of the LLC, similar to stockholders in a corporation. Members typically receive an ownership stake in the LLC commensurate with their investment (either financial investment or sweat equity).
13. What Is a Member-Managed LLC?
Most multi-member LLCs choose the member-managed LLC option. In a member-managed LLC, all members participate in the decision-making process and the work of the company. Significant decisions, such as entering contracts and securing loans, must have approval by most of an LLC’s members.
Most states consider an LLC to be member-managed unless specified on the company’s Articles of Organization. While states don’t require one, a member-managed LLC should have an Operating Agreement explaining each member’s responsibilities in running the company, decision-making authority, and how profits should be distributed among members.
The member-managed management structure may be preferable if:
The LLC’s members want to be actively involved in the company’s work, i.e., producing, selling, or supporting the production and sale of its products or services.
The LLC has limited resources and does not want or can’t support a management level between the business and its owners.
Some possible downsides of a member-managed LLC include:
Management of the business requires a lot of time and energy, which may take away from owners’ ability to work on strategic decisions.
Investors might not be as interested in funding a member-managed LLC than they would a manager-managed LLC.
14. What Is a Manager-Managed LLC?
In a manager-managed LLC, members relinquish the authority to manage the business’s operations to whomever they designate as the manager or managers. The members in a manager-managed LLC typically make high-level decisions (such as entering contracts, signing loans, etc.) for the business. However, they do not get involved in day-to-day tasks or issues.
An LLC’s members can serve as managers. However, managers may instead be other individuals hired by the LLC or another LLC or corporation (if the state allows for that).
Note that although an LLC’s members may serve as managers, the manager role in a manager-managed LLC is not an ownership position. A manager—including any member that is designated as manager—gets compensated as an LLC employee. The employment income that a member earns as a manager is separate from that member’s status as an owner.
An LLC’s Articles of Organization must specify that it will operate as a manager-managed LLC. Also, the LLC should have an operating agreement that defines the roles and responsibilities of its managers and members.
A manager-managed LLC structure might be beneficial in situations where:
An LLC with more than one member has owners that want to invest financially in the business but do not want to be involved in the details of running the company.
An LLC’s members don’t have extensive experience running a business. By hiring someone with operations expertise, they can enjoy the perks of having their own company and feel confident that it’s in capable hands.
An LLC has many members, and it might be difficult to get multiple owners to agree on everyday business decisions. Having a manager to handle operations removes the need for consensus of all members on every small detail involved in running the business.
Parents in a family business want to involve their children in the company but don’t want to give up strategic decision-making.
Possible downsides of a manager-managed LLC include:
It might be challenging to determine how much authority to give the manager.
Some or all owners lose control over management decisions.
A manager that’s not an owner may not have as strong an understanding of the company’s vision and values as a member manager.
Paying a manager may create a financial hardship for a new LLC.
15. What Are the Tax Advantages of the LLC Structure?
As a “disregarded entity” for tax purposes, an LLC’s profits and losses flow through to its members’ personal tax returns. From a legal standpoint, an LLC is considered a separate entity from its members, so it provides some liability protection to its owners. Generally, LLC members’ personal assets are not at risk if the company gets sued or cannot pay its debts.
LLC members may choose how their business will divide the company’s profits and losses among its owners. This allows members to consider not only money invested but also time and work contributions when distributing profits.
LLC members may elect to have their LLC treated as a C Corporation or S Corporation (if they meet the qualification requirements).
16. What Are the Potential Tax Disadvantages of the LLC Structure?
All an LLC’s business profits are subject to Social Security and Medicare taxes. This may create an unfavorable financial situation for LLC owners. They must pay self-employment taxes on their distributive share of the LLC’s profits, even if they invest that money back into the business.
17. What Is the Difference Between How LLCs and S Corporations Are Taxed?
Both the LLC and S Corporation structures are taxed on a pass-through basis. Income taxes are paid at the individual owner level rather than at the entity level. Profits and losses get reported on the owners’ personal tax returns.
However, although LLCs and S Corporations are both pass-through entities, there are some differences in how taxes are handled.
Self-employment tax – Income of an LLC flows to the members involved with the business and is subject to self-employment tax. With an S Corporation, only salaries are subject to self-employment tax. Therefore, any distributions that paid out to S Corporation owners are not subject to Social Security and Medicare taxes.
Tax flexibility – The LLC offers a lot more flexibility in terms of how owners can be taxed. With an LLC, owners can determine their allocations for the year and be taxed accordingly. With an S Corporation, owners must be taxed based on their pro-rata ownership interests. For example, if one owner owns 50 percent of the business, then that person will be taxed on 50 percent of the company’s profits.
18. What Is the LLC Organizational Meeting?
The organizational meeting is held after an LLC has filed its formation documents. At the organizational meeting, many initial tasks are completed, such as:
Ratifying the Articles of Organization
Electing managers (if the LLC will be manager-managed)
Approving the LLC Operating Agreement
Issuing membership certificates
Authorizing a resolution for opening a business bank account
Agreeing to an annual meeting date or opting for no annual meeting
Other business matters may also be discussed and decided upon at the organization meeting.
19. What Is an LLC Operating Agreement?
An LLC Operating Agreement is an official contract that spells out the management and ownership of the company. It may outline details like:
How much of the company each member owns
Members’ voting rights
How profits and losses should be distributed among the LLC members
What happens when someone wants to leave the business
20. Do You Need an Operating Agreement to Form an LLC?
States do not require business owners to create an operating agreement to form an LLC. However, many states require an LLC to keep an operating agreement at its principal place of business to maintain corporate compliance. Even in states that do not require a formal operating agreement, it can be beneficial to maintain one. An LLC Operating Agreement helps avoid misunderstandings by clarifying the roles and responsibilities of the LLC’s members.
21. Does an LLC Need to Hold an Annual Meeting?
States do not require LLCs to hold annual meetings. This is one of the benefits of the LLC; it has fewer formalities than a corporation. However, if an LLC’s Operating Agreement requires an annual meeting (or other meetings), it must hold such meetings to stay compliant. Many owners choose to make meetings optional in the Operating Agreement.
22. What Is a PLLC?
In many states, licensed professionals, such as lawyers, doctors, architects, and accountants, aren’t allowed to form LLCs. This is because the states don’t want licensed professionals to escape personal responsibility for malpractice by hiding behind the LLC structure’s personal liability protection. Instead, states offer the option of forming a PLLC (Professional Limited Liability Company), a special type of LLC that’s designed for licensed professionals. PLLC rules vary by state.
23. What’s the Difference Between an LLC and PLLC?
One of the key differences between an LLC and PLLC is that members of the PLLC must be licensed professionals. To register the PLLC, they must show proof of a valid professional license. In most cases, members of a PLLC are personally liable for their own malpractice claims. However, they aren’t personally liable for other PLLC members’ malpractice claims.
24. How Can Licensed Professionals Know if the State Will Allow Them to Form an LLC, PLLC, or Something Else?
The LLC and PLLC are state constructs. As such, rules vary widely by state. For example, professionals in New York cannot form an LLC but may form a PLLC. Professionals in California cannot form an LLC or a PLLC but can form an RLLP (Registered Limited Liability Partnership) or PC (Professional Corporation). And professionals in Arizona can choose between an LLC or PLLC. The specific rules within a state may also depend on the type of profession.
25. How Does Limited Liability Work with a PLLC?
Like an LLC, the PLLC creates a separation between the individual owners and the business. A PLLC will typically protect its members from personal liability for the business debts and the malpractice of other owners within the company.
However, a PLLC member will still be personally liable for malpractice claims related to that individual’s own actions. For this reason, members can benefit from having a good malpractice insurance policy.
26. Who Can Be a Member of a PLLC?
While the specifics vary, many states limit who can be an owner or member of a PLLC. In some states, only licensed professionals of the specific service (e.g., medical practice, law firm, accounting firm) can be members in a PLLC.
27. How Do You Form a PLLC?
The process to form a PLLC is more involved and takes longer than forming an LLC. Typically, the state licensing board must first approve the PLLC’s Articles of Organization. Then the PLLC must file the Articles of Organization and other formation paperwork with the state. Most states require a signature and license number of a licensed professional to form the LLC.
28. What Is a Registered Agent?
LLCs must designate a registered agent in the state(s) where the company is registered. A registered agent (sometimes referred to as a resident agent) is a person or company officially recognized by the state that resides within the state of incorporation. It is designated by the LLC to accept service of process on behalf of the company. A registered agent may be an individual or another business entity with a physical location in the state of incorporation.
Please note that a post office box or other mail service (e.g., UPS) is usually not sufficient to qualify as a registered agent. The agent is responsible for accepting official notices from the Secretary of State and service of process in the event the corporation is sued.
An LLC’s registered agent must be available Monday through Friday from 8 am to 5 pm at the location specified on the LLC’s Articles of Organization. The registered agent’s name and address are public information, therefore giving some privacy protection to an LLC’s owners.
29. If an LLC Does Business in Multiple States, Does It Need a Registered Agent in Each?
If an LLC is foreign qualified to do business in other states, those states will generally require an LLC to have a registered agent there. For example, if a California LLC has filed the necessary paperwork in Nevada to conduct business in the State of Nevada, the state of Nevada will require a Nevada registered agent. This may be an individual or another business entity that has a physical location in the state of Nevada.
30. What Happens if an LLC Does Not Designate or Renew Its Registered Agent?
All LLCs are required by law to have a registered agent. If an LLC does not pay the fee charged by its designated registered agent, it may be considered defunct by the Secretary of State and lose its corporate status. This can be detrimental because the LLC’s owners risk losing the LLC structure’s personal liability protection.
31. What Is an Initial Report and Does an LLC Need to File One?
In certain states, new Limited Liability Companies must file an Initial Report, also known as an initial Statement of Information with the secretary of state’s office.
Information requested in an Initial Report may include:
Name and principal address
Business activity
Principal phone number and email address
Registered agent
Mailing address
Members’ names and addresses
Currently, new LLCs must file an Initial Report in the following states:
California
Connecticut
Georgia
Louisiana
Missouri
New Mexico
Anyone can file the Initial Report on behalf of the LLC. However, in most cases, the state will require at least one LLC member’s signature.
32. When Is an LLC Initial Report Due?
Usually, the Initial Report is due shortly after the LLC is formed with the state. Schedules for each state vary. Failure to provide the required information on time may result in such penalties and late fees by the state. An LLC may also be subject to suspension or dissolution if it does not meet the Initial Report deadline.
33. What Is an LLC Annual Report Filing?
The Annual Report (sometimes called “Statement of Information”) is a state requirement for LLCs in most states; all states, except Alabama and Ohio require an Annual Report filing. States request Annual Reports so that they can keep up to date with LLCs’ vital information. The requirements for this filing vary from one state to the next. On our website, we provide specifics for each state.
Typically, LLC Annual Reports ask for information about the company’s:
Name and principal address
Business activity
Principal phone number and email address
Registered agent
Mailing address
Members’ names and addresses
34. When Is the LLC Annual Report Due?
LLCs must file their Annual Reports by the state’s due date. Scheduled filings vary by state. Usually, Annual Reports are due once a year on or around the anniversary date of the LLC. Some states require them every other year or on some other schedule (for example, Pennsylvania LLCs must file an Annual Report every ten years).
35. What Happens if an LLC Does Not File its Annual Report?
Failure to submit the filing with the requested information by the requested deadline may result in the state’s assessment of penalties and late fees. In addition, states may also suspend or administratively dissolve an LLC if it doesn’t file its Annual Report.
36. Which Is the Best State for Forming an LLC?
You often hear of entrepreneurs registering their businesses in Delaware, Wyoming, or Nevada even if they don’t have a physical presence there. That’s because Delaware offers flexible, pro-business statutes. Wyoming and Nevada are attractive because they feature low filing fees and no state corporate income, franchise, or personal income taxes.
The general rule of thumb is that if an LLC has fewer than five members, it’s probably best to register in the state where members live or where the business has a physical presence (such as an office). Registering in a state that’s different from where the LLC has a physical presence brings additional fees and paperwork. For most small businesses, the added hassle and costs aren’t worth the potential advantages that come from being registered out of state.
37. When Is the Best Time to Form an LLC?
Often, it’s best to file an LLC as soon as possible after starting a business. After all, the main benefit is liability protection. By waiting, business owners expose themselves to liability.
An LLC’s start date is not retroactive. As a result, owners will probably need to file two sets of income tax returns for the business if it changes to an LLC mid-year. For example, if an LLC were formed on June 1, its owner(s) would need to file taxes as a sole proprietor or partnership from Jan. 1 through May 31—and then file taxes as an LLC from June 1 through Dec. 31.
38. How Does Someone Submit an LLC Filing?
There are three common methods for forming an LLC. Each has its pros and cons, so the right choice is a matter of preference.
Do-it-yourself – DIY is the lowest cost method, but business owners need to do everything themselves. It’s the best option for saving money. But it can demand a lot of time because most people aren’t familiar with the paperwork or the process. With this route, business owners must deal with lots of details and arbitrary rules. And they risk making mistakes, which could delay approval from the state and add additional fees.
Online legal filing service – This option costs slightly more than DIY. An online legal filing service will complete and file the documentation for the business. A professional service can make sure that everything is completed correctly and processed smoothly.
Lawyer – This is the most expensive option, but it may be necessary in certain situations. For example, using an attorney to complete the state filings is helpful if business owners want to incorporate and have complex requirements for how stock should be allocated or are working with millions of dollars.
Whichever method business owners choose, they should consider speaking with an attorney and tax professional before deciding if the LLC structure or other entity type will be most advantageous.
39. What Are the Steps to Form an LLC?
File Articles of Organization with the state. – Dixon Consulting can register LLCs in all 50 states, enabling business owners to save time and money while ensuring the paperwork is submitted accurately.
Obtain an EIN. – LLCs are required to have an EIN (Employer Identification Number) to open a bank account, file for permits and licenses, hire employees, and conduct other business activities. An LLC can obtain an EIN for free from the IRS. Or, Dixon Consulting can handle completing and submitting the EIN application on an LLC’s behalf.
Create an Operating Agreement. – This will help define the roles, responsibilities, and decision-making authority of the LLC’s members and managers.
Obtain business licenses and permits. – An LLC may need to have various business licenses and permits to operate in the state or local area legally. Depending on the nature of the business an LLC will conduct, it may need federal licenses, too. Dixon Consulting can help LLCs determine which licenses and permits they’ll need—and we can submit the applications to obtain them.
Start a business bank account. – An LLC must keep its finances separate from its owners. Therefore, it’s essential to open a business bank account and use it only for the purposes of the LLC. LLCs that commingle personal and business funds risk “piercing the corporate veil,” (i.e., breaking down the separation between the LLC and its owners), which could result in the owners losing their personal liability protection.
Apply for trademark protection. – When forming an LLC, it prevents another company from filing under the same name in the same state. But this is far different from federal trademark protection, which protects your name in all 50 states. Officially registering an LLC’s name as a trademark with the USPTO (U.S. Patent and Trademark Office) helps prevent others from using the name. With trademark protection, it’s easier to bring a suit in a federal court if another company hijacks your name after you’ve registered it.
Sign agreements, contracts, and loans in the LLC’s name. – After an LLC is registered with the state, its members must sign contracts under the official LLC name filed in the formation paperwork.
Get business liability insurance coverage. – Creating an LLC minimizes owners’ personal liability. However, it’s not a substitute for insurance that can help protect LLC members if their personal actions result in an injury, property damage, or another instance that causes a lawsuit against the business. Insurance comes in different forms depending on a business’s risks. I encourage business owners to speak with a reputable insurance agent or broker who is familiar with the needs of small businesses.
Keep the LLC compliant. – An LLC must also pay attention to the ongoing compliance requirements it must fulfill to remain a legal entity in good standing with the state. Compliance obligations vary from one state to the next. Some common examples of what many LLCs need to pay attention to include:
Filing taxes
Renewing licenses and permits
Filing annual reports with the state
Holding member meetings and taking meeting minutes
Updating the state about significant changes in the business (e.g., change in address or adding a new member)
40. How Can Dixon Consulting LLC Help?
After you’ve talked with your lawyer and accountant and have made an informed decision about the management structure for your LLC, Dixon Consulting’s filing experts are here to help you launch your business. We have expertise and experience in preparing and filing LLC formation documents in all 50 of the United States. When you trust your business filings to us, you save money and time. And you gain the peace of mind that your paperwork will be completed accurately and quickly.
Contact us today at (212) 328-7061 and get down to business!