What is an LLC?

September 21st, 2022, 3:04 PM
We set up hundreds of LLCs every year for our clients.  Most of these LLC's are in Pennsylvania, but we have the ability to register them in most states.

Recently, we gave a client his paperwork and said "Congratulations! here's your new business." 

And he said, "but what does this mean?" 

It kind of struck me that I didn't take the time to explain this to the client.  We do so much of this work, and we're so familiar with LLC's and how they operate.  It was like having my mechanic explain to me all the things he did to my brakes.  I just wanted to know whether my car could stop safely.

This client needed me to slow down a little bit, and stop and explain what it meant to have an LLC.

When you set up a limited liability company, or when we set up a limited liability company for you, some paperwork gets filed with the Department of State.  It's pretty simple looking paperwork, it's about a page and a half of information that you send in.  It's deceptively easy, and I have a whole other series of articles about the perils of that perceived simplicity . 

Once the state accepts your filing, they send you what's called a "happy letter," and it says, we're happy to send you your filed document. And at that point, you have your LLC.  It exists.  You can look it up on the Pennsylvania Department of State website.

There are a lot of other steps you need to take in order to make sure your LLC provides the full legal protection you want.  In fact, if you don't take the additional steps, you may be exposing yourself to a lot of personal liability.  But to have a basic LLC set up, it's a two page form (or a form you submit online) and a small filing fee (which can be waived if you're a veteran).

Once the LLC is created, it's on file with the Department of State; it's a new entity. It's almost like a new person that exists under the law. So it's not you as the business owner; it's the business that is owned by you, or whatever other partners or members there may be. And that's why you should also get an EIN with your LLC, an Employee Identification Number; this is like a social security number for your business.

So now your LLC is a new entity, a new person under the law, and it gets its EIN, which is like its social security number. And then there's all the paperwork that you need, like an operating agreement, or maybe a Buy-Sell agreement that spells out how the business will run.  These are more complex topic best reserved for another article.

When your LLC is formed, it's a new separate entity, or separate person under the law.  Try to think of it that way.  That's why you can get the liability protection that a lot of people want when they set up an LLC, because the LLC is responsible for its actions, and you are responsible for your actions and we can keep those assets and those liabilities separated. 

I hope this helps you better understand exactly what it means to set up an LLC. It's very similar to a corporation that's a separate entity under the law. Contrast this to something like a sole proprietorship, which isn't a separate entity; it is just a single individual doing business. There is no separate person under the eyes of the law. 

This is why LLC's are so popular. 

If you still have questions, or want to know more about the additional documents you need for a proper LLC, contact us today!

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