The ABCs of LLCs

August 16, 2021

This article is for educational and entertainment purposes only. This is not legal advice and should not be relied on as such. Every case is different. Consult a licensed professional in your state. Viewing this website or its content does not create an attorney-client relationship with Lyda Law Firm or any of its lawyers.

Welcome to the ABCs of LLCs with Lyda Law Firm, where we will answer all of your questions about LLCs. We’ll cover topics as basic as what an LLC is and the different types of LLCs, and more complicated topics like how are LLCs taxed and how to pay yourself as an LLC owner.

The first question is the most obvious:

What is an LLC?

If you’re thinking about starting a business, you’ve probably had people tell you that you should set up an LLC.

Well, what exactly does that mean? And do you really need to do it?

First things first, LLC stands for Limited Liability Company

To understand what that means, you first have to understand liability. Liability is something that you can be held legally responsible for. In order words, a liability is a risk.

A limited liability company limits the amount of risk that you, as the LLC owner, are exposed to.

When you set up an LLC, you create a legal structure that helps protect you from potential lawsuits.

As an example, if you aren’t set up as an LLC and you open a store, and a customer hurts themself on your property, that customer could sue you personally. When we say personally, we mean that the lawsuit could pursue your personal assets, not just your business assets.

Alternatively, if you have an LLC set up and that same person sues you, they could only pursue your business assets.

Of course, there are exceptions where people can still sue you personally if you have an LLC. For example, if you engage in some sort of intentional fraud. But, for things like negligence, breach of contract, or those “slip and fall” type of injuries, an LLC will provide some level of legal protection so that your liabilities are limited to your business assets and your personal assets are not exposed.

That’s just a basic overview of what an LLC is and why you might need one. As we continue, we will dive a little bit deeper and answer even more questions about LLCs.

Types of LLCs

Now that you have a basic understanding of what an LLC is and why your business might want to be set up as an LLC, let’s talk about the different types of LLCs.

There are many different uses for LLCs, which result in different ways of setting them up. But they are all the same basic legal structure. The distinctions that we’ll outline in this section simply examines a few key differences between types.


The first distinction between different types of LLCs is whether your LLC is a single-member LLC or a multi-member LLC.

This one is pretty self-explanatory. In this context, a member is considered an owner of the LLC. So, a single-member LLC means that there is one owner. A multi-member LLC means that there are multiple owners.

The number of people your company employs has nothing to do with this distinction. You can have 100 employees, and as long as there is only one owner, it is still a single-member LLC. Conversely, your company could have zero employees and multiple members - in that case, you would be a multi-member LLC.

It is important to note that LLCs can be owned by individuals or by other LLCs. So, if you have multiple LLCs owning a single LLC, that would be considered a multi-member LLC. If just a single LLC owns another LLC, that is still a single-member LLC. We’ll discuss why a company would want to do this a little later.


Another distinction between different types of LLCs is member-managed vs. manager-managed. When you register your LLC, you will declare whether your LLC is a member-managed LLC or a manager-managed LLC.

A member-managed LLC is where the actual member of the LLC (the owner of the LLC), runs the show and manages the operations of that LLC.

A manager-managed LLC is when the member (or members) of an LLC delegate the task of managing that LLC to another person who is a non-member.


Another significant distinction you’ll see among LLCs are holding (or umbrella) LLCs and operating LLCs.

Some companies exist only to hold assets, like real estate, or to act as an umbrella holding company for other subsidiary companies. Those are considering holding companies. The reason that holding companies exist is to create additional layers of protection from liability.

On the other hand, you have actual operating LLCs. An operating LLC is a simple structure where the LLC exists to run a business (as opposed to existing to own assets).

These are just a few different types of LLCs. There are more, but these are the most common terms you should understand as a business owner.

As we mentioned earlier, all of the LLC types are all the same basic legal structure, and, depending on your state, you register them in the same way.

Keep in mind that your LLC can fall into multiple categories. For instance, you can be a single-member LLC that is a member-managed LLC and an operating LLC. In fact, that is probably the most common arrangement for small business owners.

How are LLCs Taxed?

One of the biggest questions that aspiring business owners ask is, “How are LLCs taxed?”

Like most tax-related questions, it’s not always easy to answer.

Just like a person can be taxed at the federal, state, and local level; an LLC can face some tax liability at all of those levels as well.

However, the biggest difference with an LLC is that LLCs must declare their desired tax treatment at the federal level with the IRS.

The reason that LLCs must declare a different tax treatment between the state and federal level is that the idea of an LLC is really a state law concept. That means that the IRS does not have a defined way to tax LLCs.

So, when you register your LLC, you will need to declare your tax treatment with the IRS.

What does that mean? And how do you make that discussion?

That’s exactly what we’ll cover in this chapter of the ABCs of LLCs.


If you are a single-member LLC, the IRS will default to taxing your business like a sole proprietorship. This isn’t necessarily a bad thing and some people prefer this tax treatment. The general rule of thumb is that if you are making less than a full-time wage (around $48,000) from your business, then a sole proprietorship may be the best way for you to be taxed.

If you are a multi-member LLC, the IRS will default to taxing your business like a partnership. The same general rule of thumb applies here.

Full disclosure: We are not tax experts. Consult with a local tax professional to discuss the potential tax advantages or disadvantages of different types of LLC taxation.


If you do not want to be taxed as a sole proprietorship or a partnership, you can elect to be taxed as a subchapter S-corporation.

For some companies, S-corp taxation comes with tax advantages. For instance, if you are making more than a full-time wage. The main tax advantage is that you still get the benefit of pass-through taxation.

Pass-through taxation (roughly) means that you don't have to pay taxes at both the company level and the individual level. Traditionally, corporations are taxed at the business level, and then when you take money out of the business, you're taxed on that money as well. That's referred to as double taxation - you don't want that unless you have to. That's why many business owners select S-corp treatment for their LLCs.

So how do you elect for S-corp taxation?

When you register for your Employer Identification Number with the IRS, you simply check a box for what you want your tax treatment to be. But checking that box won't be enough, you also need to fill out Form 2553 and snail mail it to the IRS.

How to Start an LLC

Now that you understand what an LLC is, let's talk about how to actually start an LLC.

Fortunately, starting an LLC is easier than you might think. In most states, you can simply go online and register an LLC with your state, right on your computer, for a small fee.

We cover the topic more in this video, but here's a quick rundown:

  1. Go to your state's Secretary of State website
  2. Follow the links to "register a new business" or something similar.
  3. Fill out the brief questionnaire. It will likely ask you to select whether you want to be a multi-member LLC or a single-member LLC and whether you want to be a member-managed LLC or a manager-managed LLC.
  4. After the questionnaire, you'll need to pay a small fee. Currently, it's $50 in Colorado. It ranges up to $400 in Massachusetts as an example.

That is pretty much all you need to do to create an LLC, but there are a few additional steps you will want to take to legitimize your business.

For instance, you'll want to register for your Employer Identification Number (EIN), also known as a Tax ID. Obtaining your EIN from the IRS is another simple process that can be done online

The other thing you should consider is drafting an operating agreement. If you are a single-member LLC, you'll want an operating agreement to show how your business runs and to help show anybody who sues you that your business is not merely an alter ego for you. An operating agreement shows that your company is a separate legal entity.

If you are a multi-member LLC, you'll also want an operating agreement to help define the relationship between you and your partners. How will disputes be resolved? What happens if somebody wants to leave the company? What happens if the others want to kick one of the owners out of the company? How does that all work? 

It's essential to go through that thought process and define the rules at the outset.

Those are the three basic steps that you should run through when creating your LLC. Registering with your state and obtaining your EIN are both relatively easy, and you may not even need a lawyer to help with those steps. But we would recommend hiring a small business attorney to help draft your operating agreement. We'll talk more about operating agreements in a future chapter.

Costs of Starting an LLC

Starting an LLC comes with some inherent costs. But As far as legally required costs, you might be surprised. 

Registering your LLC with the state is reasonably affordable, depending on where you are. Right now, the cost of registering an LLC in Colorado is $50. That price goes up as high as $400 in Massachusetts. 

Technically, that's the only legally required cost for starting your LLC. Except, of course, for taxes once you start making money.

As your business expands, you'll incur some additional costs.

If you have employees, you will have not only the cost of their wages, but also legally-required costs, such as their payroll taxes, workers comp, and unemployment insurance. 

After taxes and wages, you get into costs that aren't necessarily required, but they are prudent to protect your business from liabilities.

For example, you'll want to protect your brand by registering for a trademark for your business name and logo.

You may also want to pay a lawyer to help you draft an operating agreement, which is another cost. It's not legally required, but it is something that will help protect you. Lawyer fees can vary wildly, so we suggest you look for a flat-fee lawyer so that you can budget.

Other costs that are not necessarily legally required include insurance. Commercial general liability insurance is the most common, but you'll want to consult with a professional to determine your specific liabilities.

And of course, you'll face the costs of operating your business.

That's just a brief overview of the costs that you can expect to incur as an LLC owner. Registering with your state is the initial cost you'll face. From there, your expenses will depend on your business and industry.

Adding a DBA to an LLC

Let's talk about how to add a DBA or a trade name to an LLC.

First of all, what is a DBA? DBA stands for "doing business as," so it's an alternate name for your business. In some states it's referred to as a trade name.

Adding a trade name or a DBA to your business is a simple process. It's very similar to the simplicity of registering your LLC with your state. You go on the Secretary of State's website and register your new name for your business.

Now, why would you need a different name or an alternate name for your business? Well, there could be a number of reasons. For one, in Colorado at least, every LLC is required to have the letters "LLC" in its name. Whether it's LLC, L.L.C., or Limited, or Ltd.; it's got to have some variation of limited liability company, to identify it. So maybe you want to eliminate that from the actual name that you use for your business.

Maybe you want to have an LLC that has one legal name for your checks and for your taxes and whatnot but a different, more customer-friendly name that's facing the consumer.

Setting it up is simple and easy. You probably don’t need to hire a lawyer and you can do it online on your state’s Secretary of State website.

That’s an easy one!

What is an LLC Operating Agreement?

An operating agreement is like the constitution for your LLC. It's your founding document that governs how everything, from now on, will take place.

There are two main reasons you might need an LLC operating agreement.

The first is that it helps show the world that your LLC is something that is separate and distinct from you. It's not just an alter ego, it's not a slush fund - it is a separate legal entity. This distinction will help insulate you so that you won't get sued for your business's liabilities.

The second big reason why you would need an LLC operating agreement is to define the rules of the road for how your LLC is going to operate. This is especially important when you are a multi-member LLC.

If you have a multi-member LLC, you need to define, at the outset, all sorts of things about how your LLC is going to run.

Common questions that your operating agreement should answer include:

  • How are big decisions made?
  • How are disputes between members resolved?
  • How does a member leave the LLC?
  • How are shares issued?
  • How do you add a member to an LLC?
  • What if an LLC member acts against the LLC somehow?
  • How can you kick out a member of the LLC?

You might not want to think about these issues when starting a business, but it is important to make these decisions before any issues arise.

The best time to think about how you will face challenges in the future is when everybody is getting along. And an operating agreement helps you do that.

How to Move an LLC to a New State

There are three basic ways to move your LLC to a different state:

  1. Domesticate Your LLC.
  2. Dissolve Current LLC and Start a New LLC.
  3. Register as a Foreign Business Entity.

If you are permanently moving your LLC to a new state, one option you have is to domesticate your LLC in the new state. Domestication just means you're, essentially, legally moving your LLC to a new state.

Keep in mind, not all states allow outside LLCs to be domesticated in their state.

Generally, the first thing you need to do to domesticate your LLC is to obtain a Certificate of Good Standing, which is something you can often online from your State's Secretary of State. Then, you register it along with your request to domesticate your LLC in the new state.

Once you domesticate your LLC in the new state, then you’ll dissolve your LLC in the former state.

If you are moving to a state that does not allow for the domestication of LLCs, what you have to do is dissolve your LLC in your current state and start a new LLC in your new state.

When you're doing this, be very careful about the transfer of assets. Consult with an attorney in your new state and, likely, your old state to ensure everything goes as planned. You'll also want to consult with a tax professional about whether there will be any tax consequences for doing so. This method is kind of a workaround for states that don't allow for the domestication of foreign LLCs.

Now, if you're just doing a temporary move, or if you're trying to do business in a new state without necessarily leaving your own old state. You can simply register your LLC as a foreign business entity in the new state.

For example, if you want to be based in Colorado, but you want to do business in another state, you can go on the new state's secretary of state website and register as a foreign business entity. Different states call this type of registration different things, so make sure you know the requirements for the new state. One great benefit of this method is that you can keep your old business in its original state and still do business in other states.

Those are some basic ways to move your LLC from one state to another. To avoid unforeseen liabilities, consult with an attorney in both the new and old states. You may also want to consult with a tax professional.

How to Dissolve an LLC

Dissolving an LLC is similar to starting an LLC.

It's as simple as going on the Secretary of State's website for your state and registering Statement of Dissolution form. Currently, the fee in Colorado is $25.

But, in addition to just simply filing that form online, there are several more considerations you need to address.

First, start with your operating agreement.

  • What does the operating agreement say about dissolution?
  • If you are a multi-member LLC, who has to agree to the dissolution?
  • Is there a majority vote?
  • Does it have to be a unanimous vote?

By default, the statute in Colorado says that unanimous agreement of the members of an LLC is sufficient to allow the LLC to dissolve.

In addition to looking at your operating agreement and making sure that you have the authority to dissolve the LLC, you should document any vote that occurs between members to make sure that all of the members are in agreement and you can prove it later that everybody agreed to dissolve this LLC.

Winding up your LLC also includes things such as closing your bank accounts and distributing all of the assets of your LLC.

Then, you have to figure out if your LLC also has outstanding liabilities. Are there lawsuits pending against you? Do you have creditors? Are you in debt, as an LLC? If so, you are not required to provide a formal notice to your creditors, but doing so can be prudent because it can help protect you because it starts the clock ticking for when your creditors can try to come after the LLC or, potentially, you for those liabilities. You'll also need to take into consideration any debts the LLC has if you are distributing assets and paying out all of the former members of the LLC.

If there is a lawsuit, or even a potential lawsuit against you; you have to be very careful about taking or giving distributions from your LLC. You don't want it to look like you are trying to avoid a judgment against you. That can have serious consequences.

Those are just a few important factors to consider. But the actual process of dissolving your LLC is super-simple. You check with your operating agreement to make sure you are following your own rules about how to dissolve. Then, you simply file a statement of dissolution on the Secretary of State's website.

How to Pay Yourself in a Single-Member LLC

How you pay yourself as a single-member LLC depends on whether you have elected to be taxed as a sole proprietor or as an S-corp. For more information, check out the chapter on Selecting Your Tax Treatment in our16-Step Legal Checklist for Startups.

If you have elected to be taxed as a sole proprietorship, you simply write a check to yourself (after making sure that you have accounted for all of your business expenses).

With this payment method, you won't have typical withholdings like you would have if you were an employee of a company. You will write yourself a check and that will just be all treated as personal income. However, you will have to pay self-employment tax on your income, and those rates can be very high. You will also have to file quarterly taxes.

Once you are bringing in enough money from your LLC to make a living wage, it is typically advisable in a single-member LLC to be taxed as an S-corporation.

If you select S-corp taxation, think of yourself as an employee of your business. As both the owner and an employee, you will pay yourself in two different ways. First, you will pay yourself a salary. After your salary, you can take profit distributions from your business.

The IRS requires that you take a reasonable salary from your business. In other words, they don't want you to pay yourself all through profit distributions because those profit distributions are taxed less. They want you to pay yourself a reasonable salary as an employee of your own business to ensure that you are paying adequate payroll taxes. When you pay yourself a salary, you have to pay both the employer and employee sides of your payroll taxes.

Now, what is a reasonable salary? The IRS does not define it with great specificity - it is kind of a gray area. A reasonable salary will certainly depend on your industry, the type of job you're doing, and your locality. How much are people in your state or city being paid for doing the same type of job you're doing?

You will want to consult with an attorney or with a tax professional to make sure that you are paying yourself an adequate salary. If you pay yourself too little, it could trigger an audit and you could be subject to back taxes and penalties.

Now, once you have paid yourself that adequate salary as an employee of your own business, you can take additional amounts as profit distributions. Profit distributions are taxed at a lower rate. The lower tax rate is why business owners want to take those profit distributions and not pay themselves entirely as employees. Again, you want to make sure that you discuss this with an attorney or a tax professional, such as a CPA, to make sure that it is okay. To take a profit distribution, you can simply write yourself a check.

You will also need to pay quarterly taxes on any profit distributions. It's at a much lower rate than you would have to do as a sole proprietor, but the money is still taxed, just like any other income.

Those are the basics on how to pay yourself as a single-member LLC. If you have any additional questions, we suggest talking with a tax or legal professional in your state.

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