What is an LLC (Limited Liability Company)?
Learn what an LLC is, understand its advantages over other business structures, and see how forming an LLC affects your financing options.
A Limited Liability Company (LLC) is a business structure that combines the liability protection of a corporation with the tax flexibility and simplicity of a partnership. It is the most popular structure for small businesses in the United States.
Key Features of an LLC
LLCs offer several distinctive characteristics:
- Limited liability: Owners (called members) are generally not personally responsible for business debts
- Flexible taxation: Can be taxed as a sole proprietorship, partnership, S-Corp, or C-Corp
- No ownership restrictions: Any number of members, including corporations and foreign entities
- Flexible management: Can be member-managed or manager-managed
- Less formality: Fewer ongoing requirements than corporations
LLC Tax Options
By default, single-member LLCs are taxed like sole proprietorships, and multi-member LLCs are taxed like partnerships. However, you can elect to be taxed as an S-Corp or C-Corp if it provides tax advantages.
S-Corp Election
Many profitable LLCs elect S-Corp taxation to reduce self-employment taxes. Instead of paying self-employment tax on all profits, you pay yourself a reasonable salary (subject to payroll taxes) and take remaining profits as distributions.
LLC vs. Other Structures
Here is how LLCs compare to other business structures:
| Feature | LLC | Sole Proprietor | Corporation |
|---|---|---|---|
| Liability Protection | Yes | No | Yes |
| Pass-Through Taxes | Yes (default) | Yes | No (C-Corp) / Yes (S-Corp) |
| Formation Required | Yes | No | Yes |
| Formalities | Minimal | None | Significant |
| Ownership Flexibility | High | N/A (single) | Medium to High |
Forming an LLC
To form an LLC, you typically need to:
- Choose a unique business name that complies with state rules
- File Articles of Organization with your state (fees typically $50-$500)
- Create an Operating Agreement outlining ownership and management
- Obtain an EIN (Employer Identification Number) from the IRS
- Open a business bank account
- Obtain required business licenses and permits
Financing as an LLC
LLCs are well-positioned for business financing. Lenders view the structure favorably because it demonstrates business formality and commitment. However, there are some considerations:
- Newer LLCs have limited business credit history — personal credit matters more initially
- Most lenders still require personal guarantees from LLC members
- The liability protection does not extend to personally guaranteed debts
- Having an LLC makes it easier to build business credit over time
If you are operating as a sole proprietor and seeking financing, consider forming an LLC first. It demonstrates professionalism and can help you start building business credit.
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Read more →Important Disclosure
Not Financial Advice: The information provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. You should consult with qualified professionals before making any financial decisions.
No Guarantee of Financing: Liminal Lending Co. is a business loan marketplace that connects borrowers with third-party lenders. We are not a lender and do not make credit decisions. Submitting an application does not guarantee approval or funding. Loan terms, rates, and availability vary by lender and are subject to borrower qualifications and lender criteria.
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Rate Information: Rates, terms, and fees mentioned in this article are estimates based on publicly available information and may not reflect current market conditions or specific lender offers. Actual rates depend on creditworthiness, business financials, and lender policies.
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