Building Your Business Becoming an Owner Business Types LLC - Limited Liability Company Myths What You Need to Know About Limited Liability Companies By Jean Murray Updated on September 19, 2022 Fact checked by Mrinalini Krishna In This Article View All In This Article Myth 1: LLCs Are Like Other Corporations Myth 2: LLCs Help Tax Avoidance Myth 3: LLCs Are Complicated Myth 4: LLCs Are Not Safe Myth 5: LLCs Are For Only Tax Purposes Frequently Asked Questions (FAQs) Photo: Klaus Vedfelt / Getty Images There is a lot of confusion among small business people aboutlimited liability companies (LLCs). These myths have sprung up partly because LLCs are a newer form of business, but they have been around since 1977, when the Wyoming legislature authorized the first domestic LLC. This article discusses the most common myths about LLCs and gives you a better picture of this business type as an alternative to the corporate structure. Key Takeaways Limited liability companies (LLCs) aren’t corporations. They are a distinct type of legal entity.LLCs are simpler to run than a corporation,. LLCs owners have liability protection, separating owners from the business, in the same way as corporations. An LLC must register in every state in which it does business. LLCs aren’t a tax entity; the owners pay income taxes on business income through their personal tax returns. Myth 1: An LLC is a “limited liability corporation” and is the same as any other type of corporation. The Truth: An LLC is a "limited liability company." An LLC is similar to a corporation in its limitations on liability to the owners, but it has a different ownership structure (members instead of shareholders). An LLC is formed in a state with Articles of Organization or similar filing document, while a corporation is formed with Articles of Incorporation. While the two forms are similar in some ways, they are not equivalent. Note Some states require a certificate of organization, certificate of formation or similar filing documents to register an LLC. Check with your state’s business agency for details on how to register an LLC. Myth 2: I can set up my LLC in a state like Nevada and avoid paying income taxes. The Truth: It is true that Nevada and six other states don't have state income tax, but you still must pay federal income tax on your net income from your Nevada LLC. But if your LLC is doing business in another state, you must register with that state by forming an LLC in that state, paying the required state income taxes, state sales taxes, and fees. Doing business means you have a tax presence (called a nexus) in that state, by having property, selling products or services, having a bank account, or holding meetings in that state. You will also have to pay additional fees to your attorney and tax professional for reports and tax forms for multiple states. Note Adding up all the costs of doing business in several states can negate the savings from registering as an LLC in Nevada. Discuss the tax implications with a licensed tax professional before you make a decision on where to set up your LLC. Myth 3: Forming and running an LLC is difficult and complex. The Truth: It's much simpler to form an LLC than it is to form a corporation. The LLC must register with a state, but there are no shares of stock or reports to shareholders. Corporations must create and keep records on a variety of documents, including bylaws, minutes of shareholder meetings, and information about shares of stock. An LLC doesn’t need to keep a board of directors and file complicated annual reports. The LLC isn’t required to have a board of directors; it may be managed by the members or by a paid manager. There are no requirements for keeping records of their meetings. Of course, an LLC should always keep records of all transactions and decisions. Myth 4: Corporations are a “safer” business type than LLCs for avoiding liability. The Truth: LLC's aren't called "limited liability" for nothing. A limited liability company limits the liability of the owners to their investment in the company. A limited liability company is a separate entity from its owners, and its liability is separate from the liability of the owners unless something happens to cause the owners and shareholders personally to be sued. This concept is called “piercing the corporate veil,” taking away the separation between any business, not just a corporation, and its owners. A court might cause owners to have personal liability in cases where there is serious misconduct, like fraud or dishonesty, or a criminal act, or if it defrauds creditors. Note Of course, any company can be sued, and there is no protection against illegal activities. If you are concerned about liability, check with your attorney and insurance advisers. Myth 5: An LLC is a business entity for tax purposes. The Truth: An LLC is not a taxable entity. How an LLC is taxed depends on how many members are in the company. A single-member LLC is taxed as a sole proprietorship, reporting its income on a Schedule C as part of its personal tax return. An LLC with two or more members is taxed as a partnership. The partnership files information return on Form 1065 for the year. Then each member receives a Schedule K-1 showing their share of the partnership’s income, reported on their personal tax return. An LLC can also elect to be taxed as a corporation or an S corporation by filing an election with the IRS. This change in tax status doesn’t change the way the LLC operates. Frequently Asked Questions (FAQs) Who owns a limited liability company? An owner of a a limited liability company (LLC) is called a member. Members can include individuals, corporations, other LLCs, trusts, other legal entities, and foreign entities. There’s no limit to the number of members. Banks and insurance companies can’t be LLCs, and there are special rules for foreign LLCs. Each state has its own requirements for who can be an LLC member. What does limited liability mean for a company? Limited liability means that the liability if the LLC is limited to their investment in the business, meaning that if the business has debts it can’t pay or loses a lawsuit, the owners aren’t included. But members may be personally liable for serious misconduct, like fraud, dishonesty, or illegal actions. What are the benefits of a limited liability company? A limited liability company (LLC) is easy to start and run; there’s no complicated legal structure like a corporation. It’s simple to do taxes for an LLC compared to a corporation. The biggest benefit is that an LLC has the simplicity of a sole proprietorship or partnership with the same protection as a corporation against liability for debts and lawsuits. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. University of Alabama Law School. Hamill, Susan Pade. "The Story of LLCs: Combining the Best Features of a Flawed Business Tax Structure." Texas Secretary of State. "Selecting a Business Structure." Small Business Administration. "Choose a Business Structure." Cornell Legal Information Institute. "Articles of Organization." Tax Foundation. "State Individual Income Tax Rates and Brackets for 2022." Sales Tax Institute. "What is Nexus?" Digital Media Law Project. "Corporate Records." Cornell Law School Legal Information Institute. "Piercing the Corporate Veil." New York Courts. "Liability for the Conduct of Another – Piercing the Corporate Veil." 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