Limited Liability Companies: What You Need to Know
A limited liability company, commonly known as an LLC, is a hybrid form of corporate structure that allows its members great flexibility in running their business while protecting them from personal liability. Here is what you will need to know about what an LLC can do for your business and what steps you must take to form one.
Deciding If an LLC Is Right for You
Whether or not an LLC is a good idea for your business will depend on what it is you intend to do. If you plan to engage in any kind of activity that may leave you open to lawsuits, an LLC can shield you from personal liability. Similarly, if you have a lot of personal assets that you want to protect, an LLC may make sense even if your business is a low-risk venture. There is more involved in forming an LLC than a partnership or sole proprietorship as far as filing paperwork and maintaining company records. However, the protections an LLC affords make it an attractive choice for many business owners. Each state has its own regulations as to who is eligible to form an LLC.
How an LLC Differs From a Corporation
Both an LLC and a corporation are separate legal entities that afford owners protection from personal liability. Both types of companies need to be registered with your state government, and reports must be filed annually. However, that is where the similarities end.Some corporations are limited as to the number of shareholders they can have while an LLC can have an unlimited number of members. Corporations also have more stringent record keeping requirements and require formal proceedings such as board of directors meetings. Stock in a corporation is easily transferred while transfer of membership in an LLC may require the consent of the other members. An LLC allows for a flexible management style, where a corporation has a more rigid structure. Finally, most LLCs are not required to file a business tax return, and the company’s profits and losses can be passed through to the members.
Steps Necessary to Form an LLC
Forming an LLC is fairly simple. Once you have decided on a name for your LLC, you will need to register your business with the state. This will involve filing your company’s Articles of Organization. This may also be referred to as a Certificate of Organization or Certification of Formation, depending on what state you live in. There will likely be a fee associated with filing your organizational documents. You also need to select a registered agent for the business. This person will receive all official legal notices on behalf of the company. The registered agent may be one of the members of the company, but some businesses choose to use a third party such as an attorney to be its registered agent.
The Importance of Having an Operating Agreement
An operating agreement is a document that sets forth the guidelines for how the business will operate and the duties and responsibilities of each of the members. While your state may not require you to have one or officially file it, creating one is a good idea as it will provide clarity and can prevent future disagreements among the members. An operating agreement will typically set forth what part each member will play in the company, the membership and voting interest of each person, and how decisions about the business will be made. The agreement can also lay out how any profits will be distributed. Many companies also include sections on what will happen if a member wants to exit the LLC or new members wish to join. Having an operating agreement in place is vital to your LLC because in the absence of one, the default state rules will apply should any legal issues arise.
Tax Considerations for LLCs
The Internal Revenue Service allows an LLC to pass through its profits and losses to its individual members. If you are the sole member of your LLC, your tax return will be treated as if you are a sole proprietorship. If your LLC has more than one member, it will be treated as a partnership. In that case, the company will file a form reporting what was passed through to the members, and the members will each have to pay taxes on their share. An LLC can also elect to be treated as a corporation for tax purposes. State tax requirements may differ from the federal requirements, so you should investigate what the tax obligations are for your state.Forming an LLC can give you the protections of a corporation and the flexibility of a partnership. Understanding what is involved in setting up and maintaining an LLC is an important first step in starting a successful business.
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