For small business owners, figuring out the best ways to grow and protect their business, while also ensuring that their own personal property and income remains protected and separate, is essential. Developing a Limited Liability Company — or LLC — is one way to potentially do that. Individuals who are new to the business world may wonder … what is an LLC? The following information can help you determine if creating one is the right move for your own small business.

What is an LLC?

At its most basic definition, an LLC is a type of business structure. Each state has its own set of laws and regulations for LLCs. It’s essential to work with a local attorney or accountant for your location-specific rules. Having said that, most LLCs have the following characteristics in common.[1]

  • An LLC can be classified as either a corporation (an S-Corp or a C-Corp), a partnership, or as part of the LLC’s owner’s tax return. This is often referred to as a “disregarded entity”. LLCs with at least two members are considered partnerships, unless they file a specific tax form to be treated as a corporation. One-member LLCs are treated as an entity disregarded as separate from its owner. That means taxes for this business are paid as part of the owner's own personal return. Like a two member LLC, a one-member LLC can also file a form to become a corporation, as opposed to a disregarded entity. 
  • Owners of an LLC are referred to as its members. There is no maximum number of members allowed. In most states, you can even have a single-member LLC with only one member.
  • Some businesses — like banks and insurance companies — cannot become LLCs.

What Are the Pros of an LLC?

When considering how to structure your business, the following are some of the perks that come with forming an LLC.[2]

  • Taxes. Members traditionally pay tax on LLC business profits on their personal federal income tax returns, thereby skipping taxation at the company level. This is referred to as “pass-through entity” taxation and could bring down how much tax is paid when compared to businesses that have different structures.
  • Liability. A member’s personal assets are, for the most part, protected and held separate from the actions of a company in an LLC. Say, for example, that your business runs into financial trouble and creditors come seeking collections. Any personal bank or investment accounts, or other assets held in your own name, are usually not eligible for collection if your company was an LLC.
  • Ease of setup. You don’t have to be an accountant to run an LLC — although you can hire one to help you out if you’d like. While fees and taxes will vary by state, most LLCs are simple enough to set up, don’t tend to take too much time and may even be cheaper than other business structure options to set up.

What Are the Cons of an LLC?

Like most business decisions, LLCs also come with some cons to consider.[3]

  • Taxes. It's not a misprint: Taxes are in both columns. While skipping company taxation can be nice, there are other tax implications to consider. Unless your LLC opts for corporation status, it will be considered a partnership whose members are self-employed. That means members are responsible for self-employment taxes — like Social Security and Medicare — based on business earnings. This can make filing personal tax returns trickier and, in some cases, more expensive. For LLCs that file to become S corporations, though, members will pay taxes based on their individual income, not the (larger) company profits.
  • Liability limits. It’s true that in most cases the owner’s personal assets are held separate from their business. There are, however, extenuating circumstances where a judge might rule otherwise. To avoid having that happen, keep your business expenses separate from your personal ones (through the use of separate bank accounts, credit cards, etc.), remain aboveboard with the information you share with any other members and, obviously, avoid fraudulent activity. Business insurance can also help keep both your business and personal assets protected.
  • Upkeep. Setup is generally considered painless, but there are usually annual state filings to consider. Staying on top of this is essential to avoid paying additional fees. Again,working with a business attorney or account can help.

How Do I Create an LLC?

Once you’ve decided that an LLC is the right move for your business, the setup can usually be completed in a few steps.[4]

  1. Figure out your team. Before starting you’ll want to decide if using a professional, like a business lawyer and/or accountant, will be helpful. They can help you understand the rules pertinent to your specific area, like getting a copy of the Articles of Organization necessary to file for an LLC in your state.
  2. Put faces and names to your LLC. Before filing you’ll need a business name. You’ll also need to pick a registered agent to receive the paperwork and documents on behalf of the LLC. You can pick yourself or any other LLC member to become the agent, as long as the person is at least 18 years old.
  3. File your Articles of Organization form. Once you’ve filled out the paperwork, you’ll file your Articles of Organization form (or whatever the equivalent form is called in your state) with the agency that handles business filings in your state. Check your secretary of state’s website for more information. You’ll also likely pay a filing fee at the time of filing.
  4. Make it official for your members. Once you file your Articles of Organization with the state and pay any necessary fees, you’ll legally be considered an LLC in the eyes of the state. If you have more than one member, though, don’t stop there. Consider creating an operating agreement that contains pertinent details — like financial, management and legal rights for each member — and having all members sign it. 
  5. Keep your LLC running. Refer to either the website where you got your Articles of Organization paperwork, your business lawyer or accountant to see what you need to do to ensure your LLC stays in good standing. For example, you might need to pay annual fees or file an annual report listing any updates.

Structuring a business correctly is one of the first big steps that business owners will make. Consider these other critical steps that are often overlooked when starting a business, and consult with the PNC Small Business Insights page to stay up-to-date on other trends and insights that can help your business succeed.