Do I need a lawyer to form an LLC?

No. All states allow business owners to form their own LLC by filing articles of organization. In most states, the information required for the articles of organization is non-technical -- it typically includes the name of the LLC, the location of its principal office, the names and addresses of the LLC's owners, and the name and address of the LLC's registered agent (a person or company that agrees to accept legal papers on behalf of the LLC).

Now that most states provide downloadable fill-in-the-blank forms and instructions, the process is even easier. And LLC filing offices are becoming more accustomed to dealing directly with business owners; they often allow business owners to email questions to them directly.

Of course, if you're trying to decide whether the LLC is the right structure for your business, you may want to consult an expert. You may also want an expert to review your operating agreement or set up your bookkeeping and accounting systems.

Does my LLC need an operating agreement?

Although most states' LLC laws don't require a written operating agreement, you shouldn't consider starting business without one. Here's why an operating agreement is necessary:

• It helps to ensure that courts will respect your personal liability protection by showing that you have been conscientious about organizing your LLC.
• It sets out rules that govern how profits will be split up, how major business decisions will be made, and the procedures for handling the departure and addition of members.
• It helps to avert misunderstandings among the owners over finances and management.
• It allows you to create your own operating rules rather than being governed by the default rules in your state's LLC laws, which might not be to your benefit.

For more information, see Creating an LLC Operating Agreement.

How are LLCs taxed?

Like sole proprietorships (one-owner businesses) and partnerships, an LLC is not considered a separate entity from its owners for tax purposes. This means that the LLC does not generally pay any income taxes itself; instead, the LLC owners pay taxes on their allocated share of profits (or deduct their share of business losses) on their personal tax returns.

LLC owners can elect to have their LLC taxed like a corporation. This may reduce taxes for LLC owners who need to retain a significant amount of profits in the company.

For more on reporting and paying taxes as an LLC owner, see How LLCs Are Taxed.

What are the differences between a limited liability company and a partnership?

The main difference between an LLC and a partnership is that LLC owners are not personally liable for the company's debts and liabilities. This means that creditors of the LLC usually cannot go after the owners' personal assets to pay off LLC debts. Partners, on the other hand, do not receive this limited liability protection unless they are designated "limited" partners in their partnership agreement.

Also, owners of limited liability companies must file formal articles of organization with their state's LLC filing office, pay a filing fee, and comply with certain other state filing requirements before they open for business. By contrast, people who form a partnership don't need to file any formal paperwork or pay any special fees.

LLCs and partnerships are almost identical when it comes to taxation, however. In both types of businesses, the owners report business income or losses on their personal tax returns; the business itself does not pay tax on this money. In fact, LLC and partnerships file the same informational tax return with the IRS (Form 1065) and distribute the same schedules to the business's owners (Schedule K-1, which lists each owner's share of income).

For guidance on deciding which ownership structure is most suitable for your business, read Choosing the Best Ownership Structure for Your Business.

Can I convert my existing business to an LLC?

Yes. Converting a sole proprietorship or a partnership to an LLC is an easy way for sole proprietors and partners to protect their personal assets without changing the way their business income is taxed.

Some states provide a simple form for converting a partnership to an LLC (often called a "certificate of conversion"). Sole proprietors and partners in states that don't provide a conversion form must file regular articles of organization to create an LLC.

In some states, before a partnership can officially convert to an LLC, it must publish a notice in a local newspaper that the partnership is being terminated. And in all states, you'll have to transfer all identification numbers, licenses, and permits to the name of your new LLC, including:

• your federal employer identification number
• your state employer identification number
• your sales tax permit
• your business license (or tax registration), and
• any professional licenses or permits.

For general information on forming an LLC, read How to Form an LLC.