What is a Limited Liability Company?

A Limited Liability Company, also known as an LLC, is a legal business structure that protects your assets (home, car and personal bank accounts) in case your company is sued. An LLC is mostly used for operating a business (you can have multiple businesses in one LLC), but it can also be used to take title to assets. For instance, to own real estate, automobiles, boats and aircrafts, you can also create an LLC.

LLC owners are usually called “Members”

An LLC can be owned by one person (Single Member LLC). or two or more people (Multi Member LLC). It is created by this filing form (LLC Articles of Organization) with your state’s government agency along with paying a one-time filing fee. You can find out the cost to form an LLC in each state from here: LLC filings fees by state.

The reasons behind forming an LLC

The basic reason to form an LLC is for the protection of your personal assets. LLC creates a “protective wall” between your business and your personal assets. Personal assets mean everything you own: your home, bank accounts, properties, jewellery, vehicles etc.

Your personal assets cannot be attacked

Even if your LLC is sued, creditors can only attack your LLC assets for the settlement of those business debts and liabilities. Yet your personal assets are secure. They will not be considered a part of your business. But if you do not get your LLC created, your personal assets are at risk if your business is sued.

Correct LLC Language

A couple of common mistakes that people generally make when talking about LLC are:

“I want to form a Limited Liability Corporation.”

There is no such thing as a Limited Liability Corporation. An LLC is a Limited Liability Company.

“I’m going to LLC myself.”

This is also incorrect to say. You cannot “LLC yourself”. But you can form an LLC for the sake of your business. An LLC is separate from you. It is not you. You form the LLC to own and manage it.  It is important to understand the difference between these terms so that you can speak smartly about your business.

An LLC is better or a Corporation?

It is most often asked if people should form an LLC or form a Corporation.

The followings are the main differences between both:

The LLCs do not have to elect a board of directors; Corporations do.

LLCs do not need to hold board meetings; Corporations do.

The LLCs are not subject to double taxation; Corporations are.

LLCs can distribute profits however they want; Corporations can’t.

We can say that LLCs are the most acknowledged and the most versatile business structure for real estate investors, business owners and entrepreneurs.

LLCs are affordable

You only have to pay a one-time filing fee to form your LLC. The setup fee is affordable compared to forming a Corporation. Setting up an LLC is much cheaper than losing your personal assets. And even if your state has high filing fees, it is well worth the assurance that your assets are fully protected.

LLCs are low maintenance

After your LLC is set up, there are only a few requirements to keep it active. Firstly, you have to send your LLC Annual Report to your state (Not all states require Annual reports). Secondly, you have to file your state and local taxes. Other than this, you only need to file a simple form when you change your address.

LLC can be used to run multiple businesses

Either you can use one LLC for multiple businesses or you can create multiple LLCs. For further information, please click here: can you have two businesses under one LLC?

How to form an LLC?

You have to do the following steps to form an LLC:

• Choose a name for your LLC.
• Prepare your Articles of Organization, Certificate of Organization or Formation. File by mail or file for LLC online with the Secretary of State and pay the filing fee.
• Wait a few business days to get your LLC approved.

These are the main steps to form an LLC. There are a few more steps like Operating Agreement, Federal Tax ID Number (EIN), and Annual Report.

How an LLC Protects Your Personal Assets?

Set up a Legal Entity for your business so your personal assets won’t be at risk of being used for covering business debts and liabilities.

One should think big and move fast. These are important steps to success. But in the beginning, moving too fast can be dangerous. Many new entrepreneurs jump into their business very quickly, they overlook important details, making costly mistakes. These mistakes can put their businesses in a long-term danger.

The first newbie mistake

The top mistake that people usually make is not setting up a Legal Entity for their business. If you do not create it, your business is just a Sole proprietorship (single owner) and a Partnership (2 or more owners) in the perspective of law, it can also expose your personal assets. If a Sole proprietorship or a Partnership gets sued, your personal assets are at risk of being used for the settlement of debts and liabilities.

So the most common Legal Entities that people form are LLCs and Corporations.

Before getting forward, let’s discuss what a Legal Entity actually is.

Legal Entity

A Legal Entity is almost the same as a Business Entity. Let’s use both the terms to make it more easily understandable to you.

According to the law, a Business Entity is a “Legal Person”, you and I are “Natural Persons.” Natural Peron is a living, human being that exists independently and makes his own decisions. Legal Person, on the other hand, is only functional through the actions of Natural Persons acting on his behalf. A Legal Person is, by law, a separate person from its owners.

Protective Wall

“A protective wall” between your assets and the assets of the business.. The purpose of LLC is to keep your personal assets safe in case your business is sued.

A Natural person is a regular human being like you and I. A Legal Person is a Corporation like Microsoft or IBM or it can also be a local store. Even though a Business Entity is not an actual living person but it shares many rights and responsibilities like a Natural Person.

Things that a Business Entity can do

• It can make money
• Can own properties 
• It can make contracts and agreements
• Can open bank accounts
• It can sue and be sued
• Can pay taxes

It actually means, the only things that a Legal Entity cannot do is vote for an election or do the household chores.Through a Legal Entity, you can create a business organization that can interact with customers, clients and more.

Protecting Your Assets

Most important of all, a Legal Entity can safeguard your personal assets. In case of a lawsuit, creditors can only go after your assets of Legal Entity not your personal assets.

Personal Liability Protection

Personal Liability Protection is the number one reason that make people to go for setting up a Business Entity. Not creating a Business Entity means allowing the law to view your business as a Sole Proprietorship or a Partnership. It cannot keep your assets safe. Keep it in mind, if any of these is sued, your personal assets are also at a risk of being used in place of your debts and liabilities. But, if you create a Business Entity and then your business is sued, then the only thing at risk is your Business Entity, not your personal assets. It can create a “Protective wall” between your business and your personal assets. The main types of Business Entities that people usually form are Corporations and Limited Liability Companies (LLCs).

You can get more information on these by clicking here: Sole Proprietorship vs. LLC vs. Corporation.