What Is an LLC? A Beginner’s Guide

A Limited Liability Company (LLC) can be your golden ticket to financial independence, and setting one up might be easier than you think.

Although an LLC isn’t required to bring your side hustle or business idea to life, having one gives you liability protection; should your business ever go under, your personal belongings won’t be up for grabs. LLCs also you keep more of the money you earn from gigs or clients in your pocket.

For many, filing an LLC can feel intimidating because of all the business jargon. You can file an LLC yourself, hire a lawyer to help you, or use a third-party service like LegalZoom to accelerate the process.

What Is an LLC?

A limited liability company is a business formation structure unique to the United States. It’s formally known as a statutory business entity, and is the most popular business formation in America thanks to its simplicity.

LLCs, and their sister formation, the limited liability partnership (LLP), were created in 1977 as a way for people to limit personal liability and make filing taxes with the Internal Revenue Service (IRS) simpler. The technical term for this approach is pass-through entity. In an LLC, you are only taxed on your profits for federal tax purposes, and these profits receive pass-through tax treatment; they are “passed through” to owners to claim on their personal tax returns.

The biggest reason to start an LLC is liability protection. If someone were to sue a company for one reason or another, a limited liability company ensures that the owners’ personal assets cannot be seized or forfeited during litigation, even if there are unpaid business debts. As long as you keep your business and personal spending in separate accounts, legal judgments and debt collectors won’t be able to touch your house, car, or other personal property in the event your business structure goes under.

Look at that — already getting into the jargon. Let’s back all the way up and establish a baseline on what having an LLC can do for you.

What Does Owning an LLC Mean?

The United States government incentivizes forming a limited liability company, because when businesses grow, they create jobs and contribute to the overall economy. LLC owners receive several money advantages, and learning how to form an LLC now can give you a confidence boost down the line.

Here are some of the biggest perks to setting up an LLC.

Opportunities to save money

When you have a business formation like an LLC, you are taxed on the company’s profits. Expenses you accrue to grow your passion are classified as expenses, which will reduce your taxable income. For example, if you purchase a new computer or some video equipment that will be used mainly for your side hustle, you can classify those purchases as business expenses, which will reduce your overall tax burden and create tax advantages.

Access to capital and other funding opportunities

From venture capitalists to specialized institutions and foundations, there are many ways to get low-debt or no-debt outside funding to help you get things off the ground. To be eligible for this funding, however, you almost always need proof of business activity, which will require having an LLC.