Brette Sember, J.D. practiced law in New York, including divorce, mediation, family law, adoption, probate and estates, bankruptcy, credit, and much more. She is the author of more than 40 books, many of them legal self-help.
10 min. read
Updated October 25, 2023
You have a number of different options when it comes to structuring your business. You might want to consider a limited liability company, or an LLC, because in some ways you get the best of both worlds:
The good news is that just about anyone can start an LLC. You don’t need a huge company, lots of employees, or anyone but yourself (except in Massachusetts, where you need to have two owners).
The owners of an LLC are called “members” and there are no special qualifications required, but in most states, you can’t form one if you are in certain licensed professions, such as an attorney or a medical doctor. In that case, you can form a professional corporation, or PC.
You can have as many members (owners) as you want in your LLC, but most LLCs keep the ownership small (no more than five members), since you do need to work closely with each other and have a shared vision. Be sure the members are people you trust and can work with. A good LLC is like a marriage in that way.
Now that you’ve set up your LLC, you can get down to the business of actually running it—and that means working with the other members successfully. There are two different ways you can choose to manage your LLC:
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The main reason most people decide to form their small business as an LLC is to protect themselves from liability. An LLC shields you from liability for the company’s business debts and claims. So, if your business gets behind on a business line of credit, the bank can sue only your company and reach only your company’s assets. It can’t sue you personally or try to take your house or your car or anything you own in your own name.
You are on the hook, though, for any money you’ve invested in the LLC—because those funds belong to the LLC, but your liability is limited after that point.
LLC personal liability protection can be a great shield, but it doesn’t protect you from everything. Personal liability exceptions to LLC liability protection are the same as those faced by corporations.
The biggest pitfall that will expose you to liability is failing to keep the LLC and your personal affairs separate. You have to take your own LLC seriously if you want other people to.
If you’re just using your LLC bank account as your own personal checking account or you don’t pay your business bills from that account, then it’s going to be clear that the LLC truly is not a separate entity. In your own mind, you need to think of it as separate and act accordingly.
In your mind, work is just part of your life, so it can be hard to keep your LLC separate and keep a clear line between your personal life and your company. It’s essential you do so, though, if you want to enjoy the limited liability protections.
Business insurance can be an added layer of liability protection for you from your LLC. An insurance policy will cover liability that might affect you personally.
For example, if you own a hair salon and accidentally graze a client’s face with your scissors, you could be personally liable, since it is a personal act that caused harm to another person. But a good business insurance policy will cover this mistake and help protect your personal assets.
Business insurance also protects the LLC itself from lawsuits and claims. For example, if you own a landscaping business and one of your mowers accidentally hits a client’s marble stone lion and damages it, your business insurance will pay the claim. However, business insurance only covers liability for negligence—it doesn’t cover unpaid business debts.
While an LLC offers some tax advantages, you’ll still be paying taxes, and it’s important to do so on time and accurately. The LLC itself must file IRS Form 1065 yearly. This is the same form used by partnerships and it reports each member’s share of the profits and losses from the LLC.
Learn more about how to file your LLC taxes in this article.
Although it must file a form each year, your LLC enjoys pass-through tax liability. This means the LLC itself does not pay taxes. Instead, the LLC members are responsible for paying taxes, and each member pays their own share. So, if you have two members who are equal owners, each will be responsible for reporting half of the profits or losses for the LLC on their own personal tax returns. You’ll have to make quarterly tax payments so long as you own the LLC, so be sure to stay on top of that.
Should you reach the point where you’re ready to close the doors to your business, there are some steps you’ll need to take to officially end your LLC. In most states, unless your operating agreement says otherwise, when one member wants to leave the LLC, it must be dissolved. If more than one member wants to leave, you have the same result. And if you’re the sole member, it’s up to you.
If you want to avoid the problem of having to close down because one member wants out, you can include buy-sell guidelines in your operating agreement that set out what will happen if one member wants out, decides to retire, dies, or becomes disabled.
To close down the LLC, you need to pay off remaining business debt, fulfill any remaining obligations (such as shipping orders), and decide if you will sell business assets (such as real estate or equipment) or divide them among the members. You must pay all tax responsibilities and notify all of your creditors that you will be closing.
You must file to dissolve the LLC with your state as well. Then the members must divide any remaining assets or profits among themselves, in proportion to their ownership amounts. One or more members can decide to open a new LLC if they choose, and this may be the thing that makes the most sense if you’ve been forced to close down due to one member leaving.
Only you can answer that question, after taking into consideration your business goals and financial needs—including what types of liability issues could arise specific to the services you provide.
Whether you’re a solopreneur or building a fast-growing startup, forming an LLC can be an effective way to combine business liability protection with a flexible form of organization that’s easier to manage.
When you’re ready to form an LLC, you’ll also want to decide whether to handle the filing and paperwork on your own, or to ask a provider like LegalZoom to help.