What is an LLC? Here’s What You Need to Know

When you start a small business, there’s a lot to consider. Like many business owners, you may start by considering your business name. Should you add “LLC” at the end?

The answer is, it depends on whether an LLC is right for you. So what is an LLC and how can it potentially help you grow and protect your business? That’s what we’re here to break down.

Let’s get started!

What is an LLC?

A Limited Liability Company, or LLC, is a type of business entity you can choose for your company that determines how the business is legally considered.

Many business owners decide to register their business as an LLC because it helps protect their personal assets from risks by separating business assets from personal assets. Compared to other business entities like corporations, an LLC can be easier and cheaper to form.

Think of how it’s worded: limited liability. This means that if your small business is sued by a customer, your business’s assets are considered separate from your personal assets. This can typically help to protect your personal items like your car or house.

There’s a good chance that you’ve seen or worked with businesses that operate as LLCs. An LLC can be a business run by one person or it can have members and employees (which we’ll discuss later). In the next section, we’ll discuss the benefits of why some business owners choose to declare their business as an LLC.

Benefits of Forming a Small Business LLC

1. It can protect your personal assets.

As we mentioned, when your business is registered as an LLC, it can help keep your personal assets safe from most debts or claims against your business. So if something happens that results in you being sued, your business may have to pay a sum of money to a client or court.

If your business is a sole proprietorship, though, you typically risk your personal assets being lumped together with your business assets.

Say you’re a plumber and after working for a customer, their basement floods, causing about $3,000 in damage. They sue you and want you to pay to repair the basement and replace the damaged goods.

If your business was a sole proprietorship and you didn’t have those funds in your business savings account, that $3,000 would have to come from somewhere. In some cases, your valuable assets like your car or house may have to act as collateral, because your personal and business accounts are usually considered one and the same.

If you lose your car as part of a settlement, you wouldn’t be able to get to other plumbing jobs. Then you’d really be stuck!

But if your small business is registered as an LLC, your personal assets are considered separate from your business assets. That means that assets like your house and car would likely be safe if your business were to be sued.

It doesn’t mean that you’re skirting potential risks, though! Stay tuned to learn more a bit later about how to protect your business with insurance.

2. It offers flexibility for your organization.

When you start your business, you may begin looking at short-term goals. But think about the big picture: Do you want to work by yourself forever?

If you want to bring on business partners or employees one day, then forming a small business LLC can give you flexibility in how you organize your company.

That starts with deciding how things are run. There are a couple of different types of LLC organizations: manager-managed and member-managed.

In a member-managed LLC, all members work together to run the business; in a manager-managed LLC, a single member or small group of members run the business.

We’ll discuss this in more detail in our section on “how to start an LLC,” but being able to specify whether your LLC is manager-managed or member-managed gives you the choice of how decisions are made for your company.

3. It has tax advantages.

Not only does forming a small business LLC help give you flexibility in how you want to run your company, but it also has tax advantages.

When it comes time to file taxes, it’s likely that your LLC will be able to be seen by the IRS as a pass-through business. Rather than be taxed twice like C corporations are (usually once on the business income and again on shareholder dividends), the LLC’s profits “pass through” to the members. Each member typically pays their taxes on their individual income tax.

So if you’re an LLC, you’re likely to be taxed similarly as if you were a sole proprietorship, and taxed only once, instead of twice like a corporation.

As an LLC, you have the option of being taxed as a corporation or partnership, despite the LLC remaining in your business’s name. That would mean you’d likely not get the tax benefits of being a pass-through entity, but you could choose this tax structure for other reasons.

To go deeper into which tax structure may be best for your specific business, consult a tax expert or accountant.

4. It can help your reputation.

As a business owner, you may find yourself spending a good amount of time choosing the right business name. And that makes sense! After all, having a creative business name can help your customers remember you and your work.

As a business owner with an LLC, it’s likely that your state will require you to include “LLC” as part of your business’s name. Even if it isn’t required by your state, including LLC in your business name on your printed materials, your website, and your business’s physical location can be beneficial.

Including “LLC” at the end of your business name can show current and potential customers that you’ve taken the extra step to register your business. It’s a branding element that can help to build trust, which is important to lasting customer relationships.

Beyond helping with customer trust-building, having the “LLC” after your business name can look good to financial institutions. If your business applies for financial assistance, such as a grant or small business loan, having an LLC can help to show your commitment to the business.

Signs You Should Start an LLC

Now that you know more about what is an LLC and how it works, how do you know if it could be the right choice for your business? There are some telltale signs you can look for below.

1. You care about protecting your personal assets.

If you own a small business on your own, it’s likely that you’re registered as a sole proprietor. And that may work for your business, but it means that your business accounts and assets are tied to your personal accounts and assets.

To some, that may seem like the simple route. But what if something were to happen, you were sued, and you’re obligated to pay a settlement?

If you’re a sole proprietor, that money could end up coming out of your personal accounts, impacting your personal credit and financial stability. And if you don’t have the funds available, a bank or financial institution could possibly come after your house or car.

When you start an LLC, there’s a separation between your business and personal accounts.

If you’re sued, your personal assets are less likely to be targeted.

This separation isn’t only helpful when it comes to financial risk, but also your business’s overall financial health. Having your personal and business finances organized in separate accounts can help make tax season much easier.

2. You want to minimize risks.

We touched on how as a business owner, you may face risks. If you’re just starting out, you may think that you don’t have to worry about risks right now.

But the chances are higher than you may think; about 36%-53% of businesses sued in a given year are small businesses. If your business ends up as part of that statistic and you’re a sole proprietor, then your assets (like your house or car) could be on the line as part of your settlement.

That’s because, like we talked about earlier, your business and personal assets are all-in-one.

As an LLC business owner, though, you’d likely be further protected since liabilities that you face would be the business’s alone and not extend to your personal assets.

Let’s look at an example. Say you own an interior design LLC company and a client sues you for $30,000 — the cost of a redesign project. If you were a sole proprietor, creditors may be able to go after your personal assets to pay what’s due.

But if your business is an LLC, and depending on other factors, your house, car, and other personal assets would likely be safe. That’s where the “limited liability” aspect of the business entity name comes into play!

3. You don’t operate your business alone.

As a business owner, at some point you may decide that you’re ready to invite someone to join and operate your business with you. But this may not mean as an employee — you might want a partner. You may not be thinking about this when you’re thinking of how to start an LLC, but that time may come sooner than you think.

Forming a small business LLC gives business owners the flexibility to run a business with other people as they want. You can structure your LLC as manager-managed or member-managed.

Depending on which state you’re in, having a member-managed LLC is typically the default, though having a manager-managed LLC has its benefits, too. If you have business partners or co-workers who want to actively run your business with you and have a say in decisions, then forming a member-managed LLC may work best for you.

If you have people interested in helping make decisions but with a more passive role, a manager-managed LLC may work better for your business. You can talk to a lawyer about your options if you have further questions about the type of LLC that best suits your business.

4. You’re ready to hire employees.

If you’re ready to hire employees, forming an LLC may be the right choice for you.

Whatever industry your business is in, it’s likely that finding the best candidates for a job can be competitive. With “LLC” as part of your business name, you help to build trust with potential employees, showing them that you run your business officially and have taken steps to be registered with the state.

If you’re looking for a way to outwardly show you care about your business and its future, you can do that by forming an LLC. If potential employees see your LLC business name, they may have a higher level of trust in your leadership.

5. You think there may be big changes ahead.

When you’re starting out, you may be focusing on taking one step at a time — and that isn’t a bad idea. But it’s also smart to look ahead.

Think of your business’s short-term and long-term goals. When you look ahead, do you see yourself growing a lot? What changes do you think could happen in the future?

If you imagine changes for your business in the future, setting up your small business as an LLC may be a good idea. If your business is currently a sole proprietorship, you may eventually work with customers who prefer to do business with a company that’s an LLC or a corporation.

Think you may even outgrow the LLC? That’s OK — there’s a good amount of flexibility when it comes to changing business entities if you decide to do that one day.

ut you’ll need a creative and unique name to put before it, so your customers will remember your business. Maybe you already have a name in mind.

If you don’t have a name yet, then it’s time to put some thought into the name you want for your business. You could choose something quirky and fun, or maybe you want to use your own name, which can be a good way to go, too.

Either way, though, it’s a good idea to reserve your business name, since your LLC paperwork could take some time to process. If someone else chose the same business name as you and finished their paperwork first, you don’t want to have to go through the research process all over again.

You can check with your state’s Secretary of State office or get started with the process at the SBA website.

Name a registered agent for your LLC.

You’re the go-to person when it comes to making decisions for your business, but because you may not always be easy to reach, you’ll need to name a registered agent for your LLC.

A registered agent is a person you choose to receive important documents, such as legal or tax notices, if you’re unable to receive them. You can choose who you want to be your business’s registered agent. They could be a business partner, lawyer, or trusted friend.

Each state has its own requirements for who can be named a registered agent, so be sure to check your state’s guidelines.

Write your LLC’s operating agreement.

When we talked earlier about organizing the structure of your LLC, we mentioned detailing how you want to run your business.

This is where an operating agreement comes into play. An operating agreement is an official document that goes in-depth as to how you want your business to be run. You note everything from who you want to make important decisions, how much profit members get, the business’s tax structure, and more.

It’s important to have an operating agreement because it can help legally protect you. Forming a small business LLC helps keep you protected from possible liabilities; spelling out how you run your business in the operating agreement can come in handy in case of a lawsuit and the official processes need to be reviewed.

Keep in mind, you can typically make the decision to change this structure by consulting with a lawyer regarding editing your LLC’s operating agreement.

File your paperwork.

Once you have your operating agreement, you’ll need to file your paperwork with the state. You’ll likely be required to file what are called “articles of organization,” which is basically referring to all of the important documents, detailing things such as:

  • Management structure
  • Percentage of interest for members
  • Rights and responsibilities of the members
  • And more

Each state may have different requirements from others when it comes to which documents to include in your articles of organization. So it’s a good idea to check with your Secretary of State to make sure you have everything you need.

Get your LLC certificate with the state.

Once you file all your information, you’ll receive a certificate from the state. When you have that in hand, you can move forward with getting other important things for your business, like a specific business bank account, and your Employee Identification Number (EIN).

We suggest making hard and digital copies of your certificates for your records — you never know when you may need to refer to the document.

Get your business license.

After you get your LLC certificate, check to see if you need a business license in your state.

Not all states require business licenses, but in some cases, it’s specific to your profession or even a local regulation set by your county or town.

If your state doesn’t require LLCs to have a business license, it’s still something to consider. Having a business license can help build trust with potential customers, improve your chances of getting financial assistance, fulfill vendor requirements, and more.

Get LLC business insurance.

Phew! At this point, you’ve done it. You’ve received the paperwork and are officially an LLC business owner. It’s time to celebrate!

The final step you may not want to miss? Getting LLC business insurance.

While forming an LLC for your business helps protect against liabilities, having business insurance is another way to make sure your hard work doesn’t go to waste.

Imagine putting in all this time, effort, and money, and then potentially losing all your hard work (and possibly your business’s future) as a result of a lawsuit.

In the next section, we’ll talk more about how LLC insurance can help protect your business, what types of coverages to consider, how much policies may cost, and more.

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What You Need to Know About LLC Insurance

Many of us are already familiar with insurance when it comes to policies for our home, health, or car.

But business insurance may be new territory for you. If that’s the case — no worries. It’s what we’re here for. Now that we’ve answered questions like “What is an LLC?” and have gone over the steps of how to start an LLC, it’s time to talk about LLC insurance.

What types of insurance you can consider.

There are a few options you may want to consider to protect your business. That’s because despite your taking every step to not make a mistake, you’re only human! Mistakes do happen. In fact, even if you think you were in-the-right, a customer can still sue you.

And if they do sue, that could mean unsettling issues for your business. Lawsuits can cost companies hundreds, thousands, and sometimes even millions of dollars. Especially for a small business, owing large amounts of money could put you into debt you aren’t prepared for. And that debt could ultimately ruin your business’s chances for a successful future.

The two types of business coverage you may want to consider are: general liability insurance and professional liability insurance.

General liability insurance, also known as commercial liability insurance, typically protects you from:

  • Third-party accidents
  • Third-party property damage
  • Bodily injury
  • And more

Let’s look at an example of how general liability coverage could be helpful.

Imagine a carpenter is building a deck for a customer. He brought his toolbox home with him at the end of the day, but later learns his customer’s child stepped on a nail in the grass. The customer claims the carpenter dropped it and is suing for the cost of their child’s medical bills.

Without insurance, the carpenter may have to pay out-of-pocket for fees the customer requests, as well as for a lawyer. But with LLC insurance, the carpenter could be covered for the costs of the medical bills and legal fees, up to the policy limit.

Professional liability insurance is coverage that typically protects you from:

  • Negligence or alleged negligence
  • Stolen ideas
  • Copyright infringement
  • And more

This time, imagine an accounting consultant is hired to do a client’s taxes. The client is happy with the work initially, but later on sues the accounting consultant.

Unfortunately, the client got audited by the IRS and owes a large amount of money. The client claims that the accounting consultant missed something important while filing the taxes and sues for negligence, requesting the consultant to pay the IRS fees.

Without a professional liability insurance policy, the accounting consultant could face paying the IRS bills with the LLC’s money. Unfortunately, the LLC may not have the money set aside for the requested fees.

With LLC business insurance coverage, though, the accounting consultant could be covered for the cost of the fees, as well as legal representation, up to the policy limit.

What LLC insurance costs.

Insurance coverage like general liability and professional liability could benefit your small business LLC. But can you put a price on protection?

It turns out you can. But don’t get overwhelmed — it isn’t as scary for your wallet as you may think.

First, the cost of insurance policies are typically different for all businesses. That’s because all businesses face risks specific to their profession. The cost of LLC insurance depends on different factors, such as:

  • Your profession
  • Your location
  • How many employees you have (if any)
  • How long you’ve been in business
  • And more

How to find LLC insurance that works for you.

Now that you know how LLC insurance could benefit your business and how much it could cost, how do you go about finding the right coverage for your business?

Like any big business decision, it’s a good idea to take your time and know all of your options. Not only can you do research to understand all of the risks your LLC business faces, but you also can choose to talk to other local business owners to hear about their experience buying insurance.

And of course, know your options! Simply Business has a great tool you can use to get free quotes and compare policies from the nation’s top insurers. It takes less than 10 minutes.

Still have questions? No problem. You can call and talk to a licensed insurance agent at Simply Business by calling 844-645-7272.

“What is an LLC?” Now You Know,

At this point, we’ve covered everything from how to start an LLC, how it may benefit you as a business owner, why business insurance is important to consider, and more.

That’s a lot of information. Feel free to keep this article on hand in case you need to refer to it again. But remember, the learning doesn’t stop here! Understanding the ins-and-outs of an LLC is just the beginning.

As you grow your business, you’ll learn all sorts of things about what works best for you and what benefits your customers. To keep tabs on things you can do to grow and protect your business, visit Simply U, our blog for business owners.

Allison Grinberg-Funes

I’ve told stories since I learned to talk and written since I could hold a pen. As a small business owner myself – I’m a freelance writer and yoga teacher – I love contributing to the entrepreneurship community in different ways (including writing for Simply Business!). When I’m not drafting articles for SB, I can be found on my yoga mat, perusing an indie bookstore, and writing (with my cat nearby of course).

Allison writes on a number of topics such as small business leadership, business structures, and employee training.