An LLC, or limited liability company, is a business structure that is a hybrid of a corporation and a partnership or sole proprietorship. The owners of an LLC are not personally liable for the company’s debts or liabilities. LLCs typically combine the flow-through taxation of partnerships and the limited liabilities of corporations. Any entity can form an LLC except for banks and insurance companies.
Advantages and Disadvantages of LLCs
Advantages of LLCs include personal asset protection, where members are not personally responsible for the LLC’s debts or lawsuits, and flow-through taxation, where profits and losses are passed through to the members, who claim them on their tax returns. Additionally, LLCs offer simplicity by being relatively easy to form and maintain, unlike S- or C-Corporations. LLCs also tend to have more credibility than sole proprietorships and partnerships due to having a more formal business structure.
Disadvantages of LLCs include a higher cost of operation than a sole proprietorship or partnership, the possibility of dissolving upon the death or bankruptcy of a member, and the downsides of flow-through taxes. Flow-through taxation is beneficial in some ways; however, LLC owners are responsible for paying taxes on their personal share of LLC income, whether or not they are given a disbursement. Additionally, LLCs are not the most suitable option if the founder is looking to become a publicly-traded company.
What Fees Do LLCs Pay?
LLCs are formal partnerships, with the owners referred to as “members” that require articles of organization to be filed with the state followed by a fee paid directly to the state. Additionally, paperwork and other fees will need to be submitted at the federal level to obtain an employer identification number.
LLC regulations vary from state to state, including filing fees that range anywhere from $50 to $500 and annual or biennial fees that arrange from $0 to $800. An LLC filing fee is a one-time fee paid to create an LLC and an LLC annual or biennial fee is a mandatory, on-going fee paid either every one or two years that keeps your LLC in compliance. Failure to file an LLC’s report and the annual or biennial fee will result in the LLC being shut down in 90% of states in the U.S.
States with the least-expensive filing fee of $50 are Arizona, Arkansas, Colorado, Hawaii, Iowa, Michigan, Mississippi, and New Mexico. Massachusetts’s $500 filing fee is the most expensive among states.
As for the mandatory, on-going annual or biennial fees, several states have a $0 fee: Arizona, Idaho, Minnesota, Mississippi, Missouri, New Mexico, Ohio, South Carolina, and Texas. California has the most expensive annual fee of $800 per year plus an additional $20 every two years.