Figuring out which business form is best suited for your entity can be overwhelming. With so many options, which do you choose? One good choice is the LLC structure. Although it is fairly new (the first LLC company was formed in Wyoming in 1977), thousands of companies have, since then, used this convenient format for its many attractive benefits.

What is an LLC?

The Limited Liability Company (LLC) is a legal form of business, recognized on both federal and state levels. For most entrepreneurs, the biggest drawing card is that an LLC separates and protects personal assets like your home, vehicle or bank account in the event of your business failing, or due to potential legal disputes. This, of course, provided no fraud or criminal behavior is committed. In addition to personal liability protection, the LLC format has many other benefits.

What are the benefits of LLCs?

1. Flexible ownership

Whether you're going it alone or with partners, an LLC can be a good option. LLCs can be owned by one or more people, and owners are called "members". An LLC with one owner is known as a single-member LLC, and an LLC with more than one owner is termed a multi-member LLC.

2. Flexible management
A multi-member LLC can be managed by:

all members, allowing all the owners to share in the business' daily decision-making (member-managed), or

managers, who can either be members or outsiders (manager-managed). This is useful to designate an outsider if, for example, members are not skilled at management.

3. Flexible tax structure

Being fairly new, the IRS does not have a specific tax category for LLCs, and instead, treats them as "disregarded entities". This means LLCs can choose to be taxed as a:

a sole proprietorship (single-owned entity where the owner is legally responsible for its debts),

partnership (a business association of two or more individuals) or

S Corporation ( this is not a type of business entity, but an IRS classification where owners pay income tax and self-employment tax on a predetermined salary).

4. Access to business loans

An LLC, as opposed to a sole proprietorship, enhances the credibility of your business and will make you more appealing to banks for loans, investors, and other forms of credit.

5. Simplicity

The LLC format requires little paperwork and is not required to hold annual meetings, record company minutes and resolutions, or assign formal officer roles. This informal structure allows owners more flexibility in the way they run their business and make decisions.

6. Growing your business

When your business outgrows the LLC format, you can easily convert it to a bigger structure by simply transferring the assets to a corporation with the same owners as the LLC. This does, however, require legal expertise and is best done with the assistance of an accountant and attorney.

What are the disadvantages of an LLC?

Pass-through taxation has many benefits, but there are also certain disadvantages:

1. Because LLCs are pass-through entities, all members are responsible for paying taxes on their share of LLC income, whether or not the profit is given to the members or reinvested.

2. All members must wait until the LLC sends out K-1 forms (issued by the IRS to report the share of business profits, losses, deductions, and credits), to complete their personal taxes. For this reason, most investors will not fund LLCs.

3. Some states levy additional taxes or higher fees on LLCs than they do on corporations.

Once you've decided that an LLC is a right format for your business, here's all you need to know to form this legal entity:

How do I form an LLC?

It's easy to form a limited liability company (LLC). Just follow these steps:

1.Select your state

The laws to form an LLC varies from state to state. However, the steps are the same.
First, decide in which state you plan to conduct business. Often the easiest and most convenient is to form your business in the state in which you live or plan to conduct business. If your business will have a physical presence like an office, storefronts, employees, etc. in a different state, you will need to register a foreign LLC there.

2. Name your LLC

Ruling names vary by state, but in general, you will need to observe these guidelines. Legally your business name:

Must include the phrase "limited liability company," LLC or L.L.C.,

Cannot include words that could confuse your LLC with a government agency (FBI, Treasury, State Department, etc.), and

Restricted words (e.g. Bank, Attorney, University) may require additional paperwork and a licensed person, like a doctor or lawyer, will have to be part of your LLC.

Should not be the same as other LLCs registered in the state in which you plan on doing business. You will want to make sure your name is catchy and legitimate. If you need help coming up with a business name, try online business name generators. Most are free. Consider registering a domain name (.com) irrespective of whether you plan on having a website now or in the future.

Also, consider setting up a professional email account. Try Google's G Suite – it's free for the first 14 days, and thereafter at a minimal monthly fee.

Finally, trademark your name – it protects the name of your business, goods, and services, and prevents others in similar industries in the U.S. from using them. You can do a trademark search on the Federal trademark Database.

3. Choose a Registered Agent

State laws require corporations and LLCs to have a registered agent. Sometimes referred to as an agent for service of process or statutory agent, a registered agent is an individual or business entity that receives or sends legal documents such as tax forms and a notice of lawsuits on your company's behalf. Many startups choose to hire a registered agent for this part of their business, but you can also appoint a friend or colleague, or act as your own registered agent. Legally, the registered agent must be over age 18, have a physical address (not a P.O. Box) in the state where the business is conducted, and be available during office hours during a workweek.

4. File Formation Documents
To make your LLC officially exist, you will need to file LLC formation documents, known as Articles of Organization, or Certificate of Organization, or Certificate of Formation, with the Secretary of State's office. You can do this on your own, with the help of a lawyer or through a professional LLC filing service. Most states offer online filing and filing fees vary per state.

5. Create an Operating Agreement
This is a crucial step you do not want to skip. An Operating Agreement is the only way for you and your members to legally define your roles, the LLCs management, and operating structure. It will give you something to refer back to in the event of disputes. Even if you are the only member it is important to have an operating agreement as it shows you recognize the LLC as a separate entity. Although you don't need to fill it with the Secretary of State, a good idea is to have your operating agreement notarized and kept in a safe place. It is highly recommended to have your operating agreement reviewed by your attorney to make sure you have all your bases covered.

6. Get an EIN

Also referred to as a Federal Tax Identification Number, you will use an Employer Identification Number (EIN), to open bank accounts for your LLC. It also allows the IRS to keep track of your business' tax report. You can apply for an EIN online, by fax, mail or phone. We recommend applying online for this free service here.