Nolo's Start & Run an LLC Bundle

If you run a small business, or are thinking about starting one, you’ve probably heard of a limited liability company, or LLC. The big advantage of an LLC is in its name: it limits your personal liability for business debts. It also has distinctive tax features that can make life simpler for a small businessperson.  Here are some common questions about LLCs.

Are LLCs better than corporations and other business entities?

It depends on your business. An LLC offers these benefits:

• Your personal liability for business debts and claims is limited.
• You report business income and loss on your personal tax return.
• LLCs are relatively simple to create.
• LLCs require less ongoing paperwork to maintain than do corporations.
• You can have one owner, or more than one.

A corporation also limits the personal liability of the shareholders. But corporations must file their own tax returns, and they require more paperwork. Sole proprietorships are simplest of all, but offer no personal protection and don’t allow co-owners (except your spouse). Partnerships work when there’s more than one owner, but don’t protect your assets from business claims.

How do I form an LLC?

Turning your business into an LLC requires filing a document called articles of organization (or something similar; different states use different terms) with your state.  In many states, all you need to do is fill out a one-page form that asks for very basic information about your business.  

Every state has its own filing procedure; commonly, LLC articles of organization are filed with a division of the secretary of state’s office. The fee may be from about $100 to $800, again depending on state law.

You should also create a document called an operating agreement. It isn’t required in all states, and you don’t have to file it with the state, but it’s essential. The operating agreement states what share of the business belongs to each owner and what share of the profits each receives. It also sets out how you’ll make decisions and what will happen if one owner wants to leave the business.

Can I form an LLC if I’m the only owner of the business?

Yes, you can. It used to be that some states didn’t allow single-member LLCs, but all do now.

Does an LLC pay taxes?

An LLC is not a “taxable entity”—in other words, it doesn’t pay taxes. That doesn’t mean that LLC income isn’t taxed, though. The LLC’s owners (called members) pay taxes on business income on their own personal income tax returns. This is called pass-through taxation, because business income and expenses are passed through to the owners. LLC owners must make quarterly payments of estimated federal income taxes.