LLC Legal Structure: Everything You Need to Know
An LLC legal structure is flexible and can be dictated by the limited liability company's owners. 3 min read
An LLC legal structure is flexible and can be dictated by the limited liability company's owners. This type of business offers its owners - called members = limited personal liability protection from business debts and obligations. An LLC is also treated as a pass-through tax entity, which means it avoids corporate tax since profits and losses pass through to each member's tax return and are taxed at the individual level.
The structure of an LLC is subject to fewer legal requirements than a traditional corporation. This entity is not required to hold shareholder meetings, appoint a board of directors, or adhere to other formalities. Profits and losses can be distributed among members however they see fit, in contrast to corporations which must distribute profits based on each shareholder's ownership percentage. Though LLCs cannot be traded publicly, you can switch to a corporation if necessary as your business grows.
LLC Membership Requirements
- Any person or entity with a financial interest in an LLC is considered a member.
- These individuals and entities can be domestic or foreign.
- Member rights and responsibilities are dictated by the operating agreement of the LLC and can vary by member as long as these differences are clearly indicated in the agreement.
- Members receive membership certificates, which note the number of units or percentage of the LLC they own.
Single-Member LLC Structure
Regardless of whether your LLC has one or many members, it can be managed by an appointed member or by a hired professional manager. The management structure is recorded in the LLC's articles of organization and/or operating agreement. If this information is not included, the LLC is member-managed by default.
An appointed or hired manager handles the LLC's daily operations, including but not limited to entering into contracts, writing checks, and hiring and firing employees. Even when a manager is hired, LLC members can retain authority for major decisions such as buying another business or applying for a loan.
Most single-member LLC owners choose to manage their companies themselves. Exceptions might include a single-member LLC that owns retail stores and needs a manager to manage employees, set up the store, manage its daily operations, and handle inventory. His or her specific duties should be spelled out in the LLC operating agreement. You can amend this agreement if you want to switch from a member-managed to a manager-managed structure or vice versa.
Establishing Your LLC
To create an LLC, you'll need to file documents called articles of organization, certificate of organization, or certificate of formation with the Secretary of State where you plan to establish your company. Many states offer a blank one-page form that you can fill out with basic details that include the name and address of your LLC, contact information for members, and the name and address of a registered agent, who must live in the state and agrees to receive service of legal process on the company's behalf. State filing fees to establish an LLC range from $100 to $800.
Creating an Operating Agreement
Although you don't legally need an operating agreement to create an LLC, this document details member rights and responsibilities, interest percentages, and profit sharing guidelines. Even if you are the only LLC member, you can still use this document to work out logistical details such as funding, decision-making, and procedures to take if you are no longer able to run the business. This document also protects your limited liability by proving separation between personal and business affairs. This prevents you from "piercing the corporate veil," subjecting your personal assets to business liability. All members must sign the operating agreement, and it cannot be amended without a unanimous vote.
LLC Tax Considerations
Your LLC will be taxed like a sole proprietorship if you are the only member and like a partnership if you have more than one member. Each member files Schedule C to report his or her share of LLC income and expenses along with the individual tax return. An LLC can also elect to be taxed as an S corporation. LLC members must make quarterly estimated tax payments. The LLC itself must file an informational return each year on IRS Form 1065.
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