As a small business owner, an aspiring entrepreneur, or a freelancer, you have several options for establishing a legal structure. While sole proprietorship offers limited protections and incorporating is often overkill for small businesses, forming a limited liability company (LLC) tends to provide the ideal balance.

So, what is an LLC business, and is it the right structure for your organization? In this article, we'll cover everything you need to know, including LLC advantages and disadvantages of an LLC and how to form this type of business.

What is an LLC?

An LLC is a business structure that provides limited liability protection for its one or more owners, known as members. It essentially prevents creditors or lawsuits from pursuing the owners' personal assets.

Think of an LLC as a legal entity that offers many of the liability limitations of a corporation and some elements of the simplicity of a sole proprietorship. However, there are a few important differences. Compared to an LLC:

• Corporations offer more personal liability protection but often have higher tax burdens. Also called C corporations, these entities are taxed on profits and have shareholders.
• S corporations also offer more personal liability protection, but without the double taxation issue that C corporations have. However, guidelines for S corporations vary by state.
• Partnerships have less personal liability protection, but they're simpler to set up than an LLC. In addition, partnerships always have at least two partners, while an LLC can have one owner.
• Sole proprietorships are designed for a single business owner and offer no protection for personal income or assets. However, this business structure is the simplest to set up and gives you the most control.

Advantages of an LLC

LLC members aren't personally liable for any debts the company incurs. While this is a significant perk, it's just one benefit of forming an LLC.

Compared to a corporation, an LLC has a relatively informal structure. While it does require filing articles of organization at the state level, it doesn't involve a board of directors, articles of incorporation, shareholder agreements, or other steps related to incorporation.

Plus, an LLC offers more income tax flexibility than other legal structures do. LLCs can use pass-through taxation, which means the business doesn't pay federal taxes directly. Instead, the members report the LLC's profits and losses on their personal tax returns.

These advantages make LLCs the most common type of partnership in the United States. As of 2021, LLCs make up 71.7% of businesses that file as partnerships.

Disadvantages of an LLC

While LLCs have plenty of perks, they also have some disadvantages. For example, the fees can add up quickly.

The cost of LLC formation varies between states, typically ranging from $50 to several hundred dollars. Most states also charge annual reporting fees, which fall within the same range.

If your LLC has a third-party registered agent, you'll need to factor in this annual cost, too. And if you opt to hire an attorney to handle the registration process, their fees also add to the cost.

You'll also need to factor in the cost of self-employment taxes. Each member of an LLC is responsible for paying self-employment taxes on their portion of the company's profits, which can make this structure expensive.

Plus, raising capital can be challenging for LLCs. Investors often prefer funding corporations, which have a legal structure that's more conducive to third-party investments.

How to Start an LLC

Now that you're clear on LLC meaning, advantages, and disadvantages, let's walk through how to start up this type of business structure. You can create an LLC in seven simple steps.

1. Decide Whether to Hire an Attorney

Technically, you can handle the registration process for your LLC independently. But in many cases, it makes sense to rely on outside help. If you go this route, you can hire an attorney or use an online service.

As legal advisor Tanya Osensky explains, working with a legal expert helps with much more than just filing paperwork. "The key difference in involving a lawyer lies not in the formation service or the resulting paperwork but in the legal advice. The importance of legal guidance significantly increases when multiple founders are involved."

2. Choose a Business Name

The first step to forming an LLC is deciding on a business name that follows applicable rules—and that isn't already registered in the state. For example, New York has a list of prohibited words for LLCs that can't appear in the name.

To confirm that your business name is original, check with the state. Most have an online search tool where you can look up existing businesses.

3. Designate a Registered Agent

Each state requires an LLC to have a registered agent to receive legal documents and other business paperwork. You can designate one of the LLC members for this role, but that isn't your only option.

You can also choose a third-party agent to handle this process and appear as your LLC's registered agent of record. Many legal services offer registered agent services for a nominal annual fee.

4. Register the LLC with the State

Next, register the LLC with the Department of State, Secretary of State, or Department of Treasury in the state where your business is based. The requirements for the articles of organization vary by state. However, most require:

• LLC name and contact details
• Member names and contact details
• Registered agent name and contact details
• Purpose and duration of the LLC

5. Develop an LLC Operating Agreement

Many states also require LLCs to have an operating agreement in place. If your LLC has more than one member, this agreement is essential for detailing how you'll manage the company, including financial and legal issues.

6. Complete Beneficial Ownership Information (BOI) Reporting

Once you've officially formed your LLC, take a moment to complete BOI reporting with the Financial Crimes Enforcement Network. Starting January 1, 2025, LLCs have 30 calendar days from registration to file this report.

7. Make a Plan to File Annual Paperwork

Most states require LLC owners to file paperwork each year, keeping the business registration active. This process typically involves filing an annual report, where you can share any updates to the corporate structure or members.

Many states also require an annual fee. Check with the state where your LLC is registered to confirm the details.

Next Steps to Form an LLC

With its pass-through taxation, personal asset protection, and straightforward registration, an LLC is a smart decision for many small business owners, entrepreneurs, and freelancers. However, if you plan to seek investors or if you want more control over your business, a corporation or a sole proprietorship may be a better option.

Ready to take the next step to make your business official? Explore top legal services that can walk you through the process.

About Anna Sonnenberg: SaaS Expert

Anna Sonnenberg is a seasoned B2B SaaS writer and small business owner. Specializing in martech, sales automation, and productivity software, Anna turns complex topics into clear, actionable insights. As a fellow entrepreneur, she's dedicated to helping you harness the right tools to grow your business.