LLC Regulations: Everything You Need to Know
Although there are several LLC regulations to follow, a limited liability company is a simple business structure for owners of small businesses to create. 3 min read
2. Rules for LLC Membership
3. LLC Regulations From the IRS
4. Liability Protection and Business Profit Regulations
Although there are several LLC regulations to follow, a limited liability company is a simple business structure for owners of small businesses to create. Forming an LLC has advantages over other business structure, including taxation and separation of the personal and business assets for owners.
Although some regulations for LLCs vary depending on the state in which it was formed, there are standard rules that all states apply to them. Besides submitting the forms required to create the LLC, business owners have additional work to do. The LLC must remain in good standing to maintain the liability protection it needs in case it faces litigation. Owners have ongoing tasks to do in order to keep all of the LLC's protections and advantages in effect.
Forming an LLC
- The business name that is selected must be unique, distinguishable from every other business registered in the state. You can check at most states' Secretary of State website by running a search on registered business names.
- LLC names must include the terms LLC, Ltd., or limited liability company.
- LLC owners who are using names that are different from their own must file a DBA form, which stands for “doing business as.” These are usually filed with both the state and the county.
- Every LLC must file articles of incorporation, which explains how many owners it will have and how it will operate. Contact the state office to obtain the necessary form.
- LLCs must have a registered agent who is appointed to receive communication on the company's behalf. It must also have a registered street address at which it can receive communications from the state government.
- States charge filing fees to form LLCs, and these range widely.
- Every state has its own requirements for licenses and permits you must obtain before doing business.
- LLCs must obtain an Employer Identification Number from the IRS if it plans to hire employees.
Rules for LLC Membership
LLC owners are also referred to as members, and a few rules apply to these as well.
- LLCs can have an unlimited number of members, or may also only have one member. Single-member LLCs are now allowed in every state in the U.S.
- LLCs may be owned by individuals, other LLCs, foreign organizations or corporations.
- A board of directors is not required for an LLC, nor does it need to keep meeting minutes.
- LLCs may be managed by their members or by non-members, although in some states the LLC must have at least one manager who is a member.
- If one of the LLC members decides to leave the organization, the LLC has to be dissolved and re-formed with the new group of members.
LLC Regulations From the IRS
LLCs are not recognized as entities by the IRS for taxation purposes. Therefore, tax filing is not a difficult process, although it depends on how many members the LLC has. The LLC can also elect to file as a corporation. It is considered a disregarded entity if it has only one member, or a partnership if it has more than one. Most LLCs do not pay income tax at the corporate level unless they elect to be taxed as a corporation.
States do not always follow the same regulations as the IRS for tax purposes. Therefore, no matter what the federal rules state, LLC owners need to make sure they understand the state rules as well.
Liability Protection and Business Profit Regulations
The main reason for choosing to form an LLC is to limit the liability for each member. The liability for each member is limited to what they contribute to the business, and their personal assets are not at risk. In the event of debts or litigation, the LLC members' homes, cars, savings accounts, etc. may not be seized.
Profits may be distributed among LLC members any way they choose, and they can decide what percentage each will receive no matter what percentage each member owns. By contrast, corporations are required to issue dividends, which are profit distributions, to shareholders according to the amount they have invested in the business.
However, unlike corporations, LLC members may not be paid wages. Their profits are subject to self-employment tax and are reported on individual members' tax returns.
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