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Limited Liability Company (LLC) Meaning and Definition

What is an LLC

What is a limited liability company (LLC)?

A limited liability company (LLC) is defined as a type of business structure where owners of the LLC are called “members” and are partners in a business entity with all the protection of a corporation.  Additionally LLCs have the ability to pass through any business profits and losses to their personal income tax return.

When they register as a LLC, it's because business owners want the liability protection a corporation can provide in a business, without the double taxation. LLC members can be an individual business owner, several partners, or other businesses.

Pros of an LLC

There are several benefits of establishing an LLC:

  1. LLC members are not personally liable for business decisions or actions taken by the LLC.
  2. The business’s profits and losses can be shared amongst the members however they prefer to divide them; it doesn’t have to be equal, though everyone claims their profits and losses on their personal income tax return.
  3. There is much less paperwork required to create and maintain an LLC by comparison to a Sub Chapter S corporation, which is similar in many ways to an LLC.

Cons of an LLC

The disadvantages of forming an LLC are relatively minor:

  • In many states, if a member dies or leaves the LLC, it needs to be dissolved and a new LLC created.
  • Since members are considered employees of the LLC, they are responsible for paying their own self-employment tax contributions of 15.3%.

How to form an LLC

Since an LLC is separate from you as an individual, you’ll need to choose a business name different from your own and that no other LLC in your state is already using. Your official business name should have “LLC” at the end, such as Designer Shoes Galore LLC.

After choosing a business name, you’ll need to complete and file Articles of Organization, which is a form that lists the company’s name, address, and all of the names of the members. Articles of Organization are typically filed with your state’s Secretary of State, but double check in your own state to be sure. Alaska, Hawaii, and Utah have no Secretary of State and in Massachusetts, Pennsylvania, and Virginia you’ll file with the Secretary of the Commonwealth. There is typically a filing fee to be paid as well.

Once you’ve filed the Articles of Organization, you’ll then need to apply for any business licenses and permits you’ll need to operate legally.

Finally, check with your state’s income tax authority to learn whether your state taxes LLC income. LLCs are not taxed at a federal level, but some states do tax LLC income.