LLC Rules: Everything You Need to Know
There are several LLC rules that must be followed, no matter what state you form your business in.3 min read
There are several LLC rules that must be followed, no matter what state you form your business in. Also, individual states may have regulations and guidelines that must be met. LLCs are created by state statute as a hybrid that combines the limited liability provided by corporations with the taxation process of partnerships and sole proprietorships.
LLCs are relatively simple for small business owners to create. They have many advantages over other forms of business entity, including the separation of personal and business assets and the way the business is taxed. Before forming your LLC, you'll want to make sure you understand the guidelines that apply in your state.
Standard LLC Guidelines
There are many standard guidelines and rules that apply to LLCs in every state. For one thing, ownership is not restricted to a certain number of members, with no maximum. Entities such as other corporations or non-U.S. citizens may be LLC members.
One of the most important differences between an LLC and a corporation is the difficulty of transferring ownership interests in an LLC. If a member chooses to leave, the LLC must be dissolved. This is also true if a member dies. The LLC must then be re-formed with the remaining members if they want to continue the business.
Articles of organization may be created at the time that the business is formed, and if the method for dealing with a member's departure is included, the LLC may be able to continue without being dissolved and re-formed.
Creating an LLC
No matter which state you're in, LLC formation involves the same steps:
- You must choose a business name that is unique from any other business in your state.
- The name of the company must end with “LLC,” “Limited Liability Company,” or similar.
- The name of the company may not include prohibited words such as bank, corporation, city, and insurance, just to name a few.
- You can research to see if your name is available at your state's LLC office.
- Most states allow you to reserve your chosen name for a certain amount of time by paying a fee.
- The LLC is formed officially when you file the articles of organization.
- The articles of organization must include basic information such as how many owners it will have.
- An LLC is required to have a registered agent to receive official communication on behalf of the business.
- Your LLC will need to obtain an Employer Identification Number (EIN) from the IRS.
Specific states may have their own rules that LLCs may follow. In your state, the articles of organization may involve a form you can fill out and may request different information. Your state may also call it a certificate of formation or certificate of organization.
Some states require you to create an operating agreement for your LLC. In most states, you do not need to file this with the state LLC office. However, it is important that you create one for your own use since it prevents future problems from occurring.
Publication requirements are another rule that some states have for LLCs. In addition to filing articles of organization, you may need to publish a notice in a newspaper that states your intention to form an LLC. This notice is required to run for a certain period of time, after which you need to submit an affidavit of publication to the office that deals with LLCs in your state. If your state has this rule, most local newspapers will be familiar with the process and can help you through it.
LLC Tax Regulations
The LLC is an entity registered with the state, but the IRS does not recognize it as a classification for taxation. It can choose to be taxed as a sole proprietorship if it has only one member. If it has more than one member, it is taxed like a partnership. It can also elect to be taxed as a corporation.
If the LLC is taxed as a sole proprietorship or a partnership, it does not pay taxes, but rather the owners report all profits on their personal tax returns. Corporations pay taxes at the corporate level and have the advantage of potentially reducing owners' self-employment tax.
Consult with a qualified attorney or CPA to determine which is right for your business, and to make sure all rules are followed.
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