Business LLC: Everything You Need to Know
Forming a business LLC is the simplest business structure.3 min read
Benefits of Forming an LLC
- An LLC has limited liability, the same as a corporation, and allows pass-through taxes and legal protection for personal assets.
- The LLC can be set up to be the general partner of a limited partnership (LP) to lessen the company's liability issues.
- LLCs are flexible unlike the stricter structure of a C corporation or S corporation.
- When it comes to profit distribution, LLC members can choose how they want to distribute the profits. With corporations, profits must be distributed based on the shareholder and their shares. Because an LLC has no shareholders, profits are disbursed regardless of the amount of the member's contribution.
- The District of Columbia and the 50 states recognize LLCs as legal entities.
- Using the "check-the-box" regulations from the IRS, a sole proprietorship can change their designation to become a limited liability company without incurring any federal tax issues.
Things to Consider When Forming an LLC
- If you are considering forming a financial company, such as a bank or insurance company, it cannot be formed as an LLC.
- Certain industries may be prevented from forming an LLC in some states.
- As a member of an LLC, you can participate in management without affecting your limited liability.
- With an LLC, you will be required to file Articles of Organization in your state.
- An Operating Agreement is recommended even if it is not a requirement for your state as it allows the owners to set the rules that will govern the operation of the business. Once signed, it is a binding agreement for members (owners) to follow.
- When an Operating Agreement isn't filed, the rules your company must follow default to the rules outlined by the state.
- If changes are necessary to your LLC, filing an amendment with the Secretary of State is required.
- Detailed records of business expenses are important to keep, and financial transactions should remain separate from personal accounts. Having separate bank accounts and credit cards for the business and personal finances are recommended.
- An owner(s) of an LLC has the option to change the way the company is taxed from a sole proprietorship or partnership to that of an S corporation or C corporation at any time.
Types of LLCs
- Domestic LLC - an LLC formed in your state.
- Foreign LLC - operates in another state other than where it was originally formed.
- Member-Managed LLC - allows all owners (members) to operate the business on an equal basis.
- Manager-Managed LLC - designated managers maintain management.
- Single-Member LLC - the LLC has one member only.
- Multiple-Member LLC - this LLC has more than one member.
- Series LLC - serves as an umbrella covering multiple separate entities.
Steps to Create an LLC
- Choose the name of your company. Reserve the name using the Secretary of State website for your state.
- Draft your Articles of Organization and file them with the Secretary of State.
- Decide if the business is to be manager-managed or member-managed.
- Determine the number of owners who will make up the LLC.
- Find out if your state requires a business license or any certificates for your specific industry and then fill out the appropriate application.
- Request an Employer Identification Number (EIN) by applying online at the IRS website or submitting form SS-4.
- Create an Operating Agreement to file along with other forms required by your state. While an OP is not mandatory in every state, it is recommended that one be drafted to outline the terms of the LLC.
Q. Can I offer shares of stock to investors?
A. No. Shares of stock cannot be issued for an LLC. This can affect the growth of the business by not being allowed to attract investors through stock options.
Q. Is a foreign LLC one that was formed outside the U.S.?
A. No. It is the designation for an LLC formed in one state but operating in another.
Q. Is operating an LLC easier than a corporation?
A. Operating an LLC is a simpler process by not having to provide annual reports, hold director meetings, or adhere to shareholder requirements.
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