If you have a business and you want to protect your personal assets from any law-suits arising out of the operation of your business or from their real estate investment, the Limited Liability Company is the commonly chosen business form to achieve that in the states. It has its origins in the German equivalent, the Gesellschaft mit begrenzter Haftung (GmbH). LLCs have characteristics of partnerships and corporations and are well suited for single owner businesses. With LLC owners have limited their personal liability for actions and debt of the LLC. Forming an LLC is a fairly easy and quick thing to do. Following are the steps that need to be done:

1. Chose a name for your company that has not already been registered by another LLC in the state you register
2. File the necessary paperwork, including articles of organization (some states call it certificate of formation) as evidence of the company´s existence. In some states (e.g. NY,  Pennsylvania, Arizona) a local newspaper notice needs to be published to inform the public about the intent to form a company.
3. Create an LLC operating agreement which lays out rules on operations and ownership
4. Get a EIN number (taxpayer ID number)
5. Transfer any required assets into the LLC if necessary
6. Get any required business licences and permits for your particular business.

Another rather new variation of the LLC is the series LLC, also known as cell LLCs. These are similar to what subsidiaries are to corporations and can be formed in certain states of the US. Each of the cells in a series LLC has their own assets and their own liabilities and is protected from any liabilities of other cells within the same series LLC. Another potential advantage is that you only have to pay one filing fee and file one income tax return per year.

Further advantages of LLCs include: They are flexible, i.e. no limit on numbers of members, individuals, companies (the llc is not allowed for banks and insurances however, and for certain professions like doctor, lawyers and accountants, the professional LLC is used). There is flexibility in setting up the rules in the operating agreement. Flexible taxation is another benefit. The LLC can be taxed as either sole proprietorship, partnership, S or C corporation. Normally, LLCs are treated as partnerships for income tax purposes, leading to pass through income taxation where the income is taxed directly on the owners private tax return. The members may chose however to be taxed like corporations, leading to double taxation of the corporations income and the dividends distributed to the owners. Another positive for foreigners is that there is no need to be an American citizen or permanent resident to form a LLC in the States. Simplified recordkeeping, no annual meeting and meeting minutes required. An LLC is usually easy and quick to form and does generally not require you to put up any minimum equity into the company.

Disadvantages include: It could prove to be not so easy to raise capital as an LLC, as the structure and transparency might not be as high as with corporations to investors and creditors. And sometimes creditors will ask for personal guarantees. Of course there is administrative costs and fees to be paid relative to sole proprietorships and depending on operating agreement provisions high formation costs. Since LLCs are relatively new, less settled case law could potentially be a disadvantage.

A question you should ask yourself is where to form your LLC, as there can be significant differences in regulations and fees and taxes. Usually the LLC is formed in the state where the business is located and conducted in. A so-called foreign qualification is obtained to conduct business in other states, avoiding the need to register in every single state of the US. In some states registering in another state than you reside in will not exempt you from the laws of the state you live in. If your nexus, the term used for the place you have your physical presence, is in California for example, you will have to pay taxes in CA, get your occupational licences in that state and adhere to California laws. If you are not residing in the US this would be another story, which I won’t go into here now. In California you will also have to pay the $800 franchise fee, while other states mostly charge significantly lower fees. Other popular states are Delaware and Nevada. Over half of the fortune 500 companies are based in Delaware, due to tax advantages and liberal business-friendly legislation. No tax needs to be paid in Delaware if no business transactions happen in Delaware, it has low franchise taxes, as well as low reporting and disclosure requirements. Similarly, Nevada does not collect personal or corporate income tax. For those interested in privacy relating to publicly disclosing of the members’ name it is worthwhile doing some research as there are differences between states as well in that respect.

Dissolution is usually feasible for a few hundred dollars, depending on the complexity of the business. An LLC can usually also be converted to a corporation if desired.

For additional protection adding on a general umbrella insurance policies to the LLC could help protect you from losing your personal assets as the liability veil can be lifted in certain cases. Check out some of the forums discussing this topic.

As every business and every entrepreneur has different needs and requirements, you should talk to your attorney and/or your accountant to decide the best way to go (I am neither).