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What Is An LLC? | How Does An LLC Work?

By
Tamia Tutson
Table of Contents

Whether you're just starting a new B2B business or direct to consumer business or are looking to restructure an existing business, you may be interested in the LLC model.

The LLC business structure allows you to grow your business like a smaller operation while having the personal asset protection of a corporation. However, it isn’t necessarily the right choice for your particular business. So, if you find yourself asking “do you need LLC for dropshipping,” you may be surprised.

Keep reading to learn what an LLC is, how it works, and the purposes of using the structure for your business.

What Is An LLC And How Does It Work?

LLC stands for limited liability corporation, and it is a business model that protects business owners from taking on personal debt or liabilities. Overall, it is every bit as functional as it is effective. Whether you’re a business owner already, or someone looking into starting a business, an LLC is one of the smartest investments you can make because it offers the protection and functionality of a corporation while also reaping many tax advantages that a corporation does not. This means you can save a lot of money on eCommerce business insurance. As a legal form of business entity, an LLC has several members that act as owners.

An LLC can operate with a single owner, dual partnership, or have multiple partners and businesses--the possibilities are limitless when it comes to an LLC. If you’re looking to avoid the mountains of paperwork and tax fees that come with owning a corporation, then you’ve hit the jackpot--an LLC not only reduces the amount of paper you have to sift through, but I can bet that your wallet will be much happier due to the substantial price difference in registering your business as an LLC. 

More than this, all LLC members can freely split any profits in any way depending on contributions made to the company. LLCs often make potential customers feel safe doing business with you, and you can trust that your name can never be sold or used by anyone else, you own it! 

If all that caught your eye, then keep reading to learn the purpose of an LLC, what type of business it is, and the difference between an LLC and a corporation. 

What Type Of Business Is An LLC?

LLC’s are hybrid business structures combining aspects of corporations and sole proprietorships or partnerships. Essentially, operating as an LLC means that you have the advantage of protecting your owners from becoming personally liable, hence the term “limited liability.” How an LLC is regulated will heavily depend on the state you live in. Certain states are more relaxed and allow anyone including foreign entities and foreigners to own an LLC; while other states are more heavily regulated and specific entities are not allowed to form an LLC.

To learn more about your state's specific regulations it is best to visit the Secretary of the States website to learn more information. There, you will be able to conduct a thorough and in-depth search on LLC business structures for your state, regulations, and find out your specific state requirements. This will save you a lot of trouble when you’re starting an eCommerce business and let you focus on making money rather than dealing with paperwork.

What is an LLC partnership

A partnership is any company that has two or more owners that share even, or different amounts, of responsibility and control of a company. Since an LLC can be owned by one or more entities, an LLC partnership means that any one of the acting member partners can make decisions on the behalf of the company. This is an attractive feature for many types of eCommerce businesses or those seeking to become business owners due to the appeal of management duties while still remaining flexible in taxes and ownership. 

What Is The Purpose Of An LLC?

Now that you know a little bit more about what an LLC is, you might be wondering what is the purpose of an LLC and what is it for? Generally speaking, couldn't you just open a business and be on your merry way? Simply put, yes you could. However, certain benefits come with owning a corporation and being a member of an LLC that you may want to consider before jumping in headfirst. 

If you have even the slightest concern about liability and legality issues within your business, then you’re going to want to look for an option that attacks these issues and provides your company with the best benefits. An LLC is one way to combat legal liability issues at the source.

Since an LLC can be used for virtually any type of business, depending on the state you live in, you have the freedom in choosing if it is the right option for you. Regardless of the size of your workforce an LLC is tailor-made to fit just about anyone--small or large. Some of the benefits of an LLC include: 

  • Asset Protection: Again, the main feature of an LLC is that the owners have limited liability. So any debts that your business incurs, you will not be made personally liable. Any person who files a lawsuit against you is therefore not able to collect anything from your personal assets including bank accounts, both checking and savings, cars, your home, cash, or machinery. Even your LLC’s bank account is limited in what can be taken. This type of protection is a breath of fresh air for many business owners who may just be starting out and learning to navigate the waters of their first business. Financial protection is important, and if you need that extra sense of security, then an LLC is the best way to go. You can also keep your money in one of the best banks for added protection.
  • Simplicity: Another benefit of an LLC is how simple it is to operate and manage. Starting a corporation means that you are tasked with the job of forming entities like a board of directors, meetings, and potential shareholders. This type of business model does not work for every company. Not to mention when you're just starting out you may not have the finances or staff to be able to afford these tools. An LLC eliminates the need for these groups of people and makes you and whomever else you want to partner with the sole individuals in charge. You can do away with the unnecessary parties and worry about forming a business plan that works!
  • Credibility and Flexibility: LLCs are known for the benefit of flexibility in ownership, taxes, and management. You can have as many or as few managers, or members in LLC terms, as you want. When it comes to taxes, anyone operating as an LLC has the option of designating themselves as a sole proprietor, which is a business run and owned by one singular person; or a partnership, which is a business run and owned by two or more individuals. If you are an LLC with multiple members you can even choose to be taxed as if you were a corporation by simply filing an election document with the IRS. Taxation rates are normally much lower for an LLC than for their corporate counterparts which only adds to the benefits of owning one. Finally, operating as an LLC  gives your customers the much-needed reassurance that your business is trustworthy. Your business name can never be taken by anyone else either. The possibilities for your business are endless when you choose to form an LLC!

What Is The Owner Of An LLC Called?

The owners of an LLC are called members. However, your LLC can either be member-managed, or manager-managed. Depending on your needs one option might work better than the other. Every LLC is required to have at least one member or single-member LLC,  but again there is no maximum limit as to how many members your LLC can have. The flexibility that an LLC offers with taxes also trickles down into the managerial aspects too. 

If you’re looking to be in a leadership position yourself then you can certainly take the lead and play a powerful role in how your business is run. On the other hand, you also have the option to choose one or multiple managers to direct day-to-day tasks and operations, and responsibilities in order to lighten the load on your shoulders. No matter which avenue you choose, when you start your LLC the role you and your manager play must be clearly defined in the written operating agreement. 

Regardless of how you choose to delegate the positions within your LLC, remember the distinction between a member and a manager. An LLC member is an owner of the LLC. There can be one or multiple members, and these members have made some form of contribution to the business. LLC members have rights to voting and profits detailed in the written agreement. An LLC manager is a group, individual, or entity that an LLC member has chosen to help manage business operations. The manager can be a third-party member of other LLCs. 

What Is A DBA For An LLC?

DBA, or “doing business as” is an assumed business name. Companies may utilize a DBA for an LLC when the name they're operating under is different from the name they legally registered the business under. For example, if your name is Tom Smith and you want to name your gardening company “The Gentle Thumbs,” then you will need to file a DBA. If your business name were to include your name and product or service, then you do not need a DBA--for example “Tom Smith’s Gardening.”

A DBA allows business owners to remain unique and stand out from many competitors doing the same line of work. Moreover, having a DBA will allow you to operate multiple businesses without needing to have multiple LLCs. However, you’ll still need to pick up an eCommerce business license if you want to operate legally beyond a certain size.  

If you’re unsure of whether or not you need a DBA then your best option is to find your local clerk's office. From there, they’ll be able to learn more about your unique situation and guide you through the process of filing. 

Overall “doing business as” is a good strategy because:

  • It’s an easy and simple way to register your name 
  • You have the benefit of operating multiple businesses without multiple LLC’s
  • A DBA can assist in keeping your business compliant
  • It allows for uniqueness and creativity that your competitors might not have 

Make your business stand out by utilizing a DBA. It can prove to be a pivotal part in helping you reach a larger base and improve your business strategy!

What Is The Difference Between An LLC And A Corporation? 

In short, the difference between an LLC and a corporation is that an LLC is owned by one or more members with a simple and free ownership management structure, while a corporation is owned by shareholders that can raise capital through the use of stock. 

You want your business to be as successful as possible. With so many options out there it can be hard to differentiate between them and decide which one adequately meets your needs. The most important step in deciding what option is right for your business is knowing the difference between an LLC and a corporation. Once you’re clear on the difference you’ll be able to make the right decision for yourself. 

If you are looking for a simple option with room to operate as you see fit, tax benefits, and less financial burden, then an LLC sounds like a better option for you. However, if you are looking for a more structured business with a clear divide in leadership and set-in-stone guidelines, then a corporation is your go-to. What you’re looking for is right in front of your eyes.

Take the leap today and become your own leader by starting an LLC or corporation! Over 60% of Americans have already started their own business. By focusing on the needs of your company you will be better able to build a business model that works. The bottom line is this: you just need to start.