Newbies 5 Basic Principles to Understanding an LLC

What is an LLC? An LLC stands for Limited Liability Company. The main reason to set up an LLC is to have personal asset protection and the simplicity it offers by way of setup and applicable tax laws.


A single person or multiple people can own an LLC. It’s managed by its members and not by a board of directors.

Personal Protection:

It is its own entity and separates from its owners. What this means is that the LLC is responsible for any lawsuits and debts incurred and not its owners.

Pass-Through Taxation:

An LLC gets its own federal tax ID or EIN that is basically the same as the company having a social security number. LLC’s have what is called a “pass-through taxation.”

What this means is that the profits of the company go to its owners and then the owners are taxed once. Unlike a corporation where the corporation is taxed for the profits, and then the members are taxed for the same profits. In other words, double taxation.

Less Regulation:

The owners of an LLC do not have to be US citizens or permanent residents. There is less regulation which means less paperwork required for set up. An LLC does not have to assign formal roles, hold annual meetings, or record company minutes.

Business Credibility:

With an LLC, your business is perceived as a formal business structure and demand peers and customers to take your business seriously, which help build your business credit history and have access to business funding.

A downfall of an LLC is that you cannot list it on the stock market or get funding from Venture Capital firms.

The 5 Basic Steps to Forming an LLC:

  • Step 1. Select a State – Preferably where the business is conducted
  • Step 2. Name your LLC – Name your company
  • Step 3. Choose a Registered Agent – Person responsible for receiving legal and tax documents on behalf of the business
  • Step 4. File the Articles of Organization – Document filed that legally creates the LLC as a registered business entity within the state
  • Step 5. Create an Operating Agreement – The legal agreement used to regulate the inner operations of the business conducive to its owners