What is an LLC? What’s a limited liability company? Many aspiring business owners tend to ask this question a lot. A limited liability company (or LLC) is one of the options they hear about when they look up resources on how to start their own business. It might even be something that friends might mention to them, although not everybody knows what it is and how to set it up.
First of all, it is not a corporation. This is a common misconception that people have. Whenever you hear someone say a “limited liability corporation”, be cautious about the advice they are giving you. The words “company” and “corporation” mean different things legally. They are not interchangeable terms.
Now that you know what a limited liability isn’t, let’s explore what it is. The phrase is a clue in itself. Basically, a limited liability company is a business entity that provides “limited liability” to its owners. In other words, the people who own the company are not personally liable for any debts, payments, or legal trouble that the company runs into. For example, if the company owes a contractor, the contractor can’t demand that the LLC owner pay with his personal funds. This is because an LLC creates a firm, legal separation between the company assets and the personal assets of its owners. It’s primarily this reason that makes an LLC one of the most popular choices among new business owners.
But this doesn’t mean that your personal assets are always immune. There are some cases, especially when it comes to fraud or misrepresentation, that a court may order an LLC owner to be legally liable for any mistakes made by the LLC.
Even if an LLC protects you in the same way a corporation does, it is much easier to file an LLC. Also, taxes are much more affordable since you only get taxed for the same income once. If a client pays your LLC, you only have to pay taxes on that payment once – via the LLC. You don’t need to pay additional taxes when you transfer the profits to your personal accounts. In a way, you’re getting the best of both worlds – you get to have limited liability but without the hassle and expense of filing for a corporation.
To set up your LLC, you need to look at your state’s specific rules and requirements. They usually ask you to submit Articles of Organization, which contains the names of the members of your LLC, as well as the description of the business. You will also need to pay a small fee.