Limited liability companies exist as a business structure in the United States. An LLC offers limited liability protection to its owner or owners (known as members). LLCs, ensure that the members are not personally liable for the company's debts or liabilities. When forming an LLC, you are provided benefits from that of a partnership or sole proprietorship as well as a corporation.
How an LLC is more flexible than a corporation
An LLC is afforded various benefits as compared to corporations. For instance, an LL can be a single-owner business, a partnership, or a multi-member structure. Rather than corporations which cannot be a single member, and in some cases no more than 100 members. There are no limits to the number of members in an LLC.
LLCs are also afforded the opportunity to elect taxation. This means that rather than automatically being taxed as a sole proprietor or partnership, you can also elect corporate taxation. This can provide a whole host of advantages and flexibility.
Flexibility in management structure is also something that is afforded for an LLC. Corporations are required to hold meetings and keep thorough records. LLCs are able to manage their businesses however they like, according to their own operating agreement.
What is Required of an LLC
Business Name
The first step to forming an LLC is to select a name. There are three main requirements regardless of the state you form in, these include:
- Must be unique
- Have the phrase “Limited Liability Company,” or another variation in it (such as LLC)
- Not include forbidden or restricted terms unless authorized to do so
Registered Agent
It is legally required for any LLC to have a registered agent. Registered agents may be a member of the LLC, or an employee, manager, or even a third party. The registered agent is required to have a legal address in the state that the LLC is formed in, in order to receive due process and legal mail on behalf of the company.
Operating Agreement
States do not require LLCs to file an operating agreement. But an operating agreement may prove to be the most important governance document an LLC can have. This is why every LLC should have one. The operating agreement dictates the functions of the managers/members, as well as how meetings can be called, and any formalities in member voting. It also includes tax and financial provisions, and any limits on issuing and transferring capital interests. Essentially it gives structure on how the LLC is managed.
Articles of Organization
Every LLC requires a Certificate of Organization. It is also known as the Articles of Organization in some states. This is your LLCs proof of existence within the state of formation. It is issued by the state and requires all potential LLCs to file with the state, along with paying the necessary state fees.
The Articles of Organization includes the following:
- LLC's name
- LLC's purpose
- Principal and mailing address of the LLC
- Duration of the LLC
- Name and address of your LLC's registered agent
- The management structure
Business Licenses and Permits
Depending on where your business is located, and the business you perform, you may need permits or licenses to operate. This will need to be acquired in order to meet all federal, state, and local laws, and to remain in good standing.
File Annual Reports and Fees
Some states will require annual paperwork that documents your business, as well as filing fees. Although this will depend on where you are formed, California charges up to $800 annually as an LLC tax. Other states have much lower fees, and some have none, but it is essential to know this before going into business.
Who is an LLC Best for?
The main difference between an LLC and a corporation is that LLCs are owned by one or more people known as members, while corporations are owned by their shareholders. No matter which entity you choose, both offer various benefits.
Forming a limited liability company (LLC) is an easy and inexpensive way to structure your sole proprietorship or small business. It provides limited liability protection and can keep your assets safe. Forming an LLC is good for those who want to benefit from pass-through taxation, and avoid double taxation that occurs with a corporation.
You might want to consider a corporation if you are looking for more flexibility when it comes to excess profits. Because all income in an LLC flows through to the members, S corporations are allowed to pass income and losses to their shareholders. This would then report taxes on an individual tax return at ordinary levels. Corporations do require a lot of documentation though, and specifics when it comes to management.
Work with a Lawyer to Create Your LLC
Although it is possible to form an LLC on your own, hiring a business lawyer can reduce the exposure of your business to lawsuits. In many cases forming an LLC is a lengthy process filled with a lot of paperwork. Using a business lawyer will help get your business in legal order for state and federal laws. This can cause you a headache down the road and ensure that you form fully in compliance.
