What is an LLC — and what are the pros and cons of setting one up?

If you're exploring which business structure to use for your company, chances are you've come across the term LLC. But what does LLC mean? And how do you know if it’s the optimal framework for your organization? 

In this guide, we’ll unpeel all the layers. We’ll explore what an LLC, its advantages and disadvantages, how to start one, and the costs involved.

We’ll also touch on how choosing the right partners can make it infinitely easier to manage an LLC, so let’s jump straight in.

What Is an LLC?

When you set up a business in the US, you need to select a legal structure in order to define your tax obligations. A limited liability company (LLC) is one such type of structure.

Under an LLC, the business is legally separate from you, its owner. This means that your personal assets are protected from debts or lawsuits.

Unlike corporations, LLCs offer flexibility in management and tax structure, making them ideal for small businesses, startups, and entrepreneurs.

Types of LLCs

Choosing the right type of LLC is crucial for meeting your business needs and ensuring compliance. Below are the most common LLC structures:

Single-member LLC

A single-member LLC is owned by one person or entity. It’s the simplest form of LLC, offering personal liability protection while allowing you to report profits and losses on your personal tax return. This structure is ideal for solo entrepreneurs or freelancers who want to protect their personal assets.

Multi-member LLC

A multi-member LLC is owned by two or more people or entities. It operates similarly to a single-member LLC but involves a more complex operating agreement to define roles, profit distribution, and decision-making processes. This type of LLC is common for partnerships or small teams.

Series LLC

A series LLC allows a single LLC to create multiple “series” or divisions, each with its own assets, operations, and liability. This structure is particularly useful for real estate investors or businesses with distinct product lines, as it protects the assets of one series from liabilities in another.

Professional LLC (PLLC)

Certain states require licensed professionals — such as doctors, lawyers, or accountants — to form a professional LLC (PLLC). This structure ensures that owners meet industry-specific licensing requirements and provides liability protection for the business itself, though personal liability for professional malpractice may still apply.

Member-managed LLC

In a member-managed LLC, all members (owners) are actively involved in running the business. This type of LLC is popular for small businesses where owners want to retain hands-on control.

Manager-managed LLC

A manager-managed LLC designates specific members or external managers to handle day-to-day operations, allowing other members to take a more passive role. This structure is suitable for businesses with many members or those seeking outside expertise in management.

L3C (Low-Profit LLC)

An L3C is a hybrid LLC designed for businesses with a social mission. It combines the profit-seeking goals of a traditional LLC with the philanthropic goals of a nonprofit. L3Cs are commonly used for ventures focused on community or environmental impact.

Each type of LLC offers unique benefits and is suited to specific business goals. As a result, it’s important to consider your operational needs, growth plans, and legal requirements before deciding.

What is the difference between ‘LLC’ and ‘Inc’?

Many potential business owners often wonder what is the difference between LLC and Inc. Ultimately, the main differences lie in structure, taxation, and management.

• LLC: Has a flexible structure, pass-through taxation, and less administrative work.

• Inc. (corporation): Has a more rigid structure, double taxation (unless it's an S corp), and stricter regulatory compliance.

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How much does it cost to start an LLC?

The cost of starting an LLC varies by state and depends on several factors, such as filing fees, optional services, and ongoing maintenance costs. Although, on the surface, initial costs may look low, it’s important to consider all direct and indirect costs, such as:

• State filing fees. The most significant upfront cost of starting an LLC is the filing fee for submitting the Articles of Organization (or Certificate of Formation, depending on your state). Some states, like Kentucky and Colorado, have filing fees as low as $50, but some states, like Massachusetts and Texas, can charge $500 or more.

• Registered agent fees. An LLC must designate a registered agent to receive legal documents and official correspondence. While you can act as your own registered agent, many businesses opt to hire a professional service to ensure compliance and convenience. This can typically cost between $50 and $300 per year.

• Name filing fees. Some states require you to reserve your LLC name before filing formation documents. This can range from $10 to $50.

• Insurance costs. Depending on your industry, your LLC may need liability insurance to protect against potential risks. This can range from $300 to $1,000 annually, depending on your coverage needs and business size.

• Additional state-specific costs. Certain states impose unique requirements for LLCs, including franchise taxes or business license fees.

What are the advantages and disadvantages of an LLC?

When deciding on a business structure, weighing up the advantages and disadvantages is key.

Advantages of an LLC

The benefits of implementing an LLC include:

Personal asset protection

One of the biggest advantages of an LLC is that it separates your personal assets from your business liabilities. If your LLC faces lawsuits or debt, your personal bank accounts and other assets (such as your house) are generally protected.

Tax flexibility

LLCs offer significant flexibility in how they are taxed. By default, single-member LLCs are taxed as sole proprietorships, and multi-member LLCs as partnerships, meaning profits are “passed through” to the owners’ personal tax returns. However, LLCs can also elect to be taxed as S Corporations or C Corporations, depending on what’s most advantageous for the business.

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Simplified management

Compared to corporations, LLCs require less administrative work and fewer formalities. There’s no need for a board of directors, shareholder meetings, or extensive record-keeping, making them ideal for small businesses and startups.

Profit distribution flexibility

LLCs allow owners to decide how profits are distributed, irrespective of ownership percentage. For example, one owner might contribute more time while another provides capital, and profit can be divided accordingly.

Professional credibility

Operating as an LLC adds credibility to your business. Clients and partners may view an LLC as more professional and established compared to a sole proprietorship.

Variety of ownership options

LLCs can have unlimited members, including individuals, corporations, or even foreign entities, giving businesses flexibility in ownership structure.

Reduced paperwork

LLCs are less burdensome when it comes to compliance. Annual filings and reporting are typically more straightforward than those for corporations.

Disadvantages of an LLC

However, there also some drawbacks to this legal structure, such as:

Self-employment taxes

Unless your LLC elects to be taxed as an S Corporation, you and your members may be subject to self-employment taxes, including Social Security and Medicare. This can result in higher taxes compared to corporations.

Limited growth potential

An LLC may not be ideal for businesses planning to scale significantly. Unlike corporations, LLCs cannot issue shares to attract investors, which might limit growth opportunities.

Variability in state regulations

LLC laws differ from state to state, which can create complexities if your business operates across multiple states. For example, you may need to register as a foreign LLC in other states, leading to additional fees and paperwork.

Complexity in ownership transfer

Transferring ownership in an LLC can be more complicated than in a corporation. Most states require all members to approve the addition or removal of members, which may not be ideal for businesses with high turnover or future succession plans.

Ongoing administrative responsibilities

While LLCs require less paperwork than corporations, they still have some compliance requirements. These include filing annual reports, renewing licenses, and paying state-mandated fees, which may be an added burden for very small businesses.

Lack of absolute liability

While LLCs offer liability protection, there are exceptions. For instance, if an owner personally guarantees a business loan or engages in fraudulent activity, they could still be held liable.

How to Start an LLC

Launching an LLC is relatively straightforward, and only requires a few steps:

1. Choose a business name. Your LLC’s name must comply with state rules and include “LLC” or “Limited Liability Company.”

2. File the Articles of Organization. Submit this document to your state’s business filing office to officially register your LLC.

3. Create an LLC operating agreement. This internal document outlines how your LLC will be managed, and includes guidance on ownership shares and decision-making processes.

4. Obtain any licenses and permits. Depending on your industry, you may need additional certifications.

5. Apply for an EIN. An Employer Identification Number (EIN) from the IRS is essential for hiring employees and opening a business bank account.

How can Remote help?

LLCs offer the perfect mix of liability protection, tax benefits, and operational flexibility for many entrepreneurs. While there are costs and complexities involved, the advantages often outweigh the downsides.

However, once you’re up and running, managing your payroll — and your payroll taxes — can create another level of complexity. Whether you’re hiring domestically or abroad (or both!), Remote Payroll can simplify all of this, and ensure that you are fully compliant with all payroll tax requirements in your and your team members’ locations.

To learn more about how we can help your business stay compliant — and save you time, money, and resources — speak to one of our team members today.

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