What is an LLC? Definition & benefits

A Limited Liability Company (LLC) is a common business structure in the United States. The term LLC in business means that the business owner has limited liability for some legal and debt issues.

Many of the 33 million small businesses in the United States choose to form an LLC.¹ An LLC can be a solid choice for many small businesses and entrepreneurs. However, it's important to consider multiple tax and reporting issues after you form an LLC.

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What does LLC mean in business?

Many people have probably heard of the term LLC. But what does LLC mean in business terms?
LLC in a business means that the business owner has limited liability in some cases.

A Limited Liability Company (LLC) is one of the most common types of businesses. An LLC is a business that helps protect owners from personal liability. LLCs can help owners separate their assets from their business liabilities.

Each state has different LLC filing requirements. Moreover, these states also have different annual reporting requirements.

The owner of an LLC is a member. LLCs can include single-member LLCs and multi-member LLCs. Individual entrepreneurs and large corporations alike can both file an LLC.

LLC members are not liable for the company’s debt or legal issues. Creditors or individuals who want to sue the individual can’t pierce the corporate veil.

What is LLC used for in business?

Business owners may decide to file an LLC for any of the following reasons:

Protection: Filing an LLC can offer the owner protection. The owner of the LLC is not liable for any of the LLC’s debt. However, timing and other factors are important. Filing an LLC does not protect the members from previous debt or legal issues.

Credibility: Filing an LLC can help you build trust with your customers. Some customers may feel more comfortable if you establish an LLC.

Taxation: Some LLC owners do not have to file taxes at the corporate level. The owner instead pays taxes at the personal level. This process is acceptable for individual entrepreneurs. However, LLCs can also choose to be taxed as a corporation.

LLC Requirements

There are several requirements for anyone who creates an LLC.

Create a unique name: Each LLC needs to create a company name that is not currently being used in the state. You can perform a search before choosing the name and applying.

Address and registered agent: LLCs need to have a real address and a registered agent. The registered agent can be an agent or an LLC member. The registered agent’s address can be your personal or company address.

Important documents: You need other important documents like the articles of organization and operating agreement. The state often prepares drafts of these when you file. The LLC owner only needs to sign these documents.

Annual reports: LLCs usually need to file an annual report and pay a franchise fee. However, some states, like South Carolina, do not require LLCs to file an annual report.²

Tax forms: LLCs also need to complete several tax forms:

• Form 1040: This form is also referred to as a Schedule C form. LLCs use this form to report their income and expenses.
• Form 1065: This form is used by partnerships that need to report their income, deductions, and other information. LLCs with 2 members are automatically taxed as a partnership.
• Form 1120: Some larger LLCs may need to complete Form 1120. Any corporation with assets above $10 million needs to complete this form.

Taxation for LLCs

Entrepreneurs, partnerships, or large corporations can form an LLC. They can be treated as a partnership, corporation, or disregarded entity. The IRS has a default tax classification for LLCs. If LLCs want to change this, they must file forms with the IRS.

Single Member LLCs are classified as disregarded entities by the IRS. If the business is a disregarded entity, the owner pays the business taxes on their personal tax return.³

An LLC with 2 members is classified as a partnership by the IRS. It is important to consider the tax and legal implications of operating as a partnership.

If you want your LLC to be taxed as a corporation, you need to file Form 8332. LLCs that file this form receive an S-corp or C-corp designation. S-corps can generally pay lower taxes, as they do not pay taxes at the corporate and personal levels.

Examples of LLC

Many companies in the United States choose to file an LLC. These companies are easy to spot, as they include the word LLC at the end of the company’s name. Most people have seen the term LLC but were unsure what LLC means in a business name.

LLCs can include individual entrepreneurs and global companies. Some famous LLCs include Pepsi-Cola, Sony, and Nike. There are around 21.6 million LLCs in the United States.⁴

Should my business become an LLC?

Some companies, like banks, financial trusts, and insurance companies, can’t file as LLCs. Federal regulations prohibit these companies from forming LLCs.⁵ Moreover, some state regulations also limit certain industries from forming an LLC.

Businesses that are eligible should consider tax laws and other relevant factors.

Some of the advantages of filing an LLC include the following:

• LLCs are easier and cheaper to file relative to other entity types
• LLCs can provide individual entrepreneurs with legal and financial protection

It may not be the best decision for everyone to file an LLC:

• It can be harder to attract investors if you operate an LLC
• The filing and reporting costs can be high for individual entrepreneurs

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All sources checked June 12, 2023.