How to Operate an LLC: Everything You Need to Know
Understanding how to operate an LLC isn't that difficult. In most cases, you will hire a team of managers to handle your company's day-to-day operations.3 min read
Understanding how to operate an LLC isn't that difficult. In most cases, you will hire a team of managers to handle your company's day-to-day operations. If you want, members of your company can take on management responsibilities. The option you choose will usually depend on the size and complexity of your organization.
LLC Operation Steps
The most common reason to form a limited liability company (LLC) is to provide company members with the same limited liability protections enjoyed by corporate shareholders. With these protections in place, LLC creditors cannot pursue the personal assets of members. If you want to keep these protections in place, however, you must be sure that you're running your company as a separate entity from its owners. In particular, you should refrain from mingling LLC assets and member assets.
Appointing managers is the most effective method of operating your LLC. Your LLC can be member-managed, and in some states, you're allowed to hire an outside manager to run your company.
Drafting an operating agreement is another important step of operating your LLC. All members should consent to and sign the operating agreement, and this document should include the following information:
- Capital contributions of members.
- Member voting rights.
- Method of profit distribution.
- LLC management option.
- How dissolution can occur.
In some states, you'll need to file this document with the state. By filing your operating agreement with the state, resolving future disputes will be much easier.
Taxes and Annual Filings
After you've completed the basic steps of operating your LLC, you need to choose your company's tax classification and file the correct paperwork. The Internal Revenue Service (IRS) will automatically tax your LLC as a partnership if you have multiple members and as a sole proprietorship if there is only one member.
If you want, you may have your company taxed as a C corporation or as an S corporation, assuming your business meets the qualifications. Filing Form 8832 will result in C corp taxation, and filing Form 2553 means you'll enjoy S corp tax treatment.
LLCs that plan to hire employees that aren't members should institute a system for withholding taxes from their employees' paychecks. You should pay these withheld employment taxes directly to the IRS. Your employees will also need to receive a W-2 each year so that they can pay their taxes.
It's also important that your company file the correct tax return each year. If you are the owner of a single-member LLC, you need to attach a Schedule C Form to your personal return. Multi-member LLCs that have not elected corporate tax treatment will use Form 1065. The company should also provide all members with a Schedule K-1 Form. If you've elected C corp taxation, you'll use Form 1120. LLCs electing S corp taxation use Form 1120S.
Depending on the state where you formed your LLC, you may need to comply with periodic filing requirements. In California, for instance, you'll need to file a biennial report known as a Statement of Information. The first Statement of Information must be filed 90 days after creation of the LLC.
Fulfilling reporting requirements will maintain your company's good standing. If your state requires an annual or biennial report but you don't file one, you may be subject to penalties and could possibly lose your right to do business in your state.
Other Things to Consider
Filing the correct paperwork is a crucial component of operating an LLC. In addition, all of your company's paperwork should indicate its liability. This serves to let the public know that your business is an LLC and that members' assets are protected. You should also be certain that you're conducting your business in writing. Never do business without a written contract in place. In addition to using contracts with vendors and clients, you should have all of your workers sign an employee contract.
It's possible that you will need to comply with specific state requirements while operating your LLC. In certain states, for example, you must publish your company's formation documents. These states include:
- New York.
Generally, you will need to publish these documents in a newspaper in the county where your company is located. Your LLC may be subject to suspension if you don't fulfill this publication requirement.
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