How Does an LLC Work?

woman filing taxes

How many people are needed to form an LLC?

There is no rule that requires an LLC to have a certain number of members or to use specific titles such as President, Vice President, Secretary etc. However, the IRS does allow one-member LLCs (single member LLC) to qualify as a pass-through entity. 

How is an LLC managed?

An LLC may either be managed by its members (member managed) or managed by selected managers (manager managed). If the LLC is managed by its members, each member will have an equal vote in the company decision-making process based on their individual stake. If the members elect a manager or managers they will be in charge of the daily affairs of the LLC. 

If managers are not selected in the Articles of Organization the LLC will default into member management. 

What is the organizational structure of an LLC?

An LLC is owned by members. A member's ownership is represented by membership interest, which is either in a percentage or units reflected on a member certificate. 

How is a limited liability company (LLC) taxed?

After organization, by default the IRS will tax an LLC as a disregarded entity, however an LLC can elect to be taxed as an S corporation by filing Form 2553 or elect to be taxed as a C corporation by filing form 8832. 

LLCs are also subject to any franchise taxes imposed by the state. Franchise taxes are typically due annually, and the amount will vary by state. *California LLCs are subject to an annual minimum franchise tax of $800 per year. The first payment must be made within 3 months of forming your LLC. The state will send a bill to remind you to make this payment.

What is Required to set up an LLC?

working woman

How do you form an LLC?

In order to register a business as an LLC, Articles of Organization must be filed with the Office of the Secretary of State and the necessary filing fees paid. After organization, by default the IRS will tax an LLC as a disregarded entity, however an LLC can elect to be taxed as an S corporation by filing Form 2553 or elect to be taxed as a C corporation by filing form 8832. 

What is a publication requirement?

There are a handful of states that require a notice to be published in a public newspaper that you hav e formed an LLC. States with this requirement include: 

  • Arizona
  • Nebraska
  • *New York

*A New York, limited liability company is required to publish notice of their formation in two seperate New York newspapers and to file proof of publication with the Department of State within 120 days. The publication is made at the county level in two newspapers. If you fail to publish the required information by the deadline the state reserves the right to prohibit you from conducting business.

LLC vs. S Corporation

woman thinking

For most small business owners choosing between an LLC and an S Corporation is the most common dilemma when picking a business structure. You should consider the advantages of both the LLC and S Corporation before you make your pick. Selecting the right structure from the start can help you maximize your chances for success. Here is a break down of the major differences to help you compare the two:

First, let's look at what is similar

  • Limited liability protection. Both entities offer a level of liability protection.
  • Separate entities. Both entities legally separate the owner(s) from the business.
  • Pass-through taxation. Both entities can be taxed as pass through entities. *LLCs require a special IRS tax election (additional filing)
  • Ongoing state requirements. Both entities are subject to filing annual reports and paying renewal fees.

What is Different?

IRS restrictions

  • S Corporations can have no more than 100 shareholders vs. LLCs can have an unlimited number of members;
  • S Corporations may not have non-U.S. citizens/residents as shareholders vs. Non-U.S. citizens/residents can be members of LLCs
  • S Corporations cannot be owned by other entities, such as Corporations or LLCs vs. LLCs may be owned by other entities


  • S corporations are required to: Adopt bylaws, issue stock, hold initial and annual director and shareholder meetings, and keep meeting minutes with corporate records.
  • It is recommended, not required that LLCs: Adopt an operating agreement, issue membership shares, hold and document annual member meetings/manager meetings and document all major company decisions.


  • S Corporations encompass directors, officers and shareholders. A board of directors oversees corporate affairs and handles major decisions whereas the daily operations are managed by elected officers i.e. CEO, CFO, CIO etc.
  • LLCs can either opt to have members or managers manage the LLC. A member managed LLC is similar to a general partnership. Decisions are made in a consensus of all members usually by a vote. Whereas a manager managed LLC is similar to a corporation leaving members to act as more of a board of directors. 


  • S Corporations are perpetual and are not required to list a dissolution date.
  • LLCs in most states are required to list a dissolution date. Typically you can request an LLC to last for 99 years.