LLC Rules By State: Everything You Need to Know
Since LLC rules vary by state, you should check the Secretary of State or other business gateway website in the state where you plan to form your LLC. 3 min read
2. Standard Rules for LLCs
3. LLC Taxation Concerns
4. LLC Liability Protection
5. State Requirements For Operating Agreements
6. Foreign LLCs
Since LLC rules vary by state, you should check the Secretary of State or other business gateway website in the state where you plan to form your LLC. However, there are several rules that apply no matter what state you are in.
Why Form an LLC?
Establishing your business as an LLC lets you separate your personal assets from your business, thereby protecting your personal property from business consequences. It also lets you avoid double taxation which takes place with corporations. It is a simple structure for businesses, it is easy to create, and it has many advantages.
Standard Rules for LLCs
There are several rules that are standard and apply to LLCs no matter which state they are formed in:
- LLCs only require one member to get started, which allows them to do so without first creating a board of directors or having a partner.
- Forming and maintaining an LLC requires much less paperwork than forming a corporation does.
- It's usually best to form your LLC in the state where you live, but there may be circumstances under which it's best to form it in a different state
- The company has to be dissolved if an LLC member chooses to leave, then the remaining members can form a new LLC
- Articles of organization are required for LLC formation.
- Any LLC that plans to hire employees must obtain a federal tax ID number, or Employer Identification Number (EIN) from the IRS.
LLC Taxation Concerns
LLCs that have just one member file taxes as a sole proprietor. If the LLC has more than one member, each member files their own tax returns using Form 1065 to report profit and loss. LLCs can also elect to file taxes as a corporation, in which case a corporation tax return must be filed. One of the few disadvantages of the LLC structure is the self-employment tax that its members need to pay.
LLC Liability Protection
Liability protection for members is one of the primary reasons for forming an LLC. Members are only risking the assets they contribute to the business. Their personal property, bank accounts, etc. are not subject to seizure in the event of a business lawsuit or outstanding debts.
Also, unlike a corporation, LLC members may share business profits however they want, regardless of what percentage each member has contributed to the business assets.
State Requirements For Operating Agreements
An operating agreement is always a useful document, even if it is not required by the state where your LLC is formed. However, in certain states, operating agreements are required by law. These include:
- New York
An operating agreement prevents future disagreements by laying out what responsibilities each member has and how profits and losses will be split. It also helps protect the limited liability status of your business. It can save you a lot of trouble in future years. Here are the requirements of the above states:
California: Although an operating agreement is required in California, it may be either oral or written. Written agreements along with any amendments it may have must be kept with the other records of the company.
Maine: Maine requires LLCs to create an operating agreement, but it may be done at any time — before, during, or after filing. It does not need to be written; it can be oral or even implied. We advise putting it in writing, however, to avoid future problems.
Delaware: Delaware's requirements for operating agreements are like Maine's. It can be created before, during, or after the LLC is formed and can also be oral or implied as well as written in a document.
Missouri: Missouri LLCs also do not need to have written operating agreements, but they do need to have at least an oral agreement that covers everything related to business conduct and powers, duties, and rights of its members, agents, managers, and employees.
New York: In New York, LLCs are required to have an operating agreement that is written, and includes information on the LLC's business and responsibilities of its members along with their preferences, limitations, and rights.
The term “foreign LLC” refers to an LLC that was formed in a different state in which it is operating. A domestic LLC is one that was formed in the same state where it operates. In order for a foreign LLC or corporation to operate in another state, there may be certain requirements it needs to meet.
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