Owning An LLC: Everything You Need to Know
Owning an LLC has many advantages that business owners will appreciate. 3 min read
Owning an LLC
Owning an LLC has many advantages that business owners will appreciate. As the owner of a business that is considering forming an LLC, it is crucial that you fully understand all that it entails.
What Is an LLC?
An LLC, or a limited liability company, is a form of business structure that is a combination of the pass-through taxation of sole proprietorships or partnerships and the limited liability of corporations. Many business owners contend that an LLC is the best of both worlds when it comes to business set-up.
Do I Need to Know About Securities Laws to Set up an LLC?
If you have no other partners in your LLC and you do not want to incorporate investors into your business, your LLC will not be considered a security, meaning you do not have to deal with any laws regarding this aspect of business. If there is a co-owner or co-owners, it is not as clear with regard to securities.
Securities are investments in profit-making businesses or organizations that are not operated by the investor. If someone invests in your business and they plan to make money from the work of others in the business, the investment is a security in the eyes of the law.
On the other hand, when a business owner relies solely on his or her own work efforts to make a profit, the ownership is not generally counted as a security. If all owners are going to be active participants in the LLC, which is not unusual particularly for start-ups, the interest in ownership will not be a security.
However, if one or more of the co-owners of the business are not going to work for the company or otherwise have a role in the operation of the business, the ownership can be treated as a security by the SEC. This is typical when a family member or friend invests in a business orit is operated by a management group.
When your ownership of the business is considered a security, you will have to qualify for an exemption from state and federal laws before any of the owners of the business can invest their own money.
If your business does not have an exemption to the securities laws, it will be necessary to register the sale of your ownership of the LLC’s interests with your state and the SEC. Thankfully, small LLCs will typically qualify for exemptions under securities law, even if they plan to eventually sell memberships to investors.
For instance, the SEC rules will provide exemptions of private sales of securities giving that all owners of the business live in one state with the sale made in that state. Thisis referred to as an intrastate offering exemption.
Private offerings are another form of federal exemption. A private offering is a sale that is unadvertised and is limited to 35 or less people, or to those that can reasonably handle the investment process themselves because of their net worth.
Many states have opted to create their own forms of federal securities exemptions. For additional information, you can visit the SEC's website.
A quick way to research the rules of exemptions in your state is to visit your state’s website or the section referring to securities. There, you will find the rules and procedures regarding the exemptions. You can find your state’s securities agency at your secretary of state’s website.
If your LLC will not qualify for exemptions, it is ideal to think about other ways to increase your cash flow.
Who Should Form an LLC?
You as one owner can file an LLC in any state. It is best to form an LLC if you are concerned about dealing with lawsuits and debt that comes from your business.
For instance, if you choose to open a business that will deal with the public, it may be concerning to you that your commercial liability insurance will not protect your personal assets from a slip-and-fall lawsuit. Choosing to operate as an LLC can help you feel more comfortable about these types of situations because your own assets will not be challenged in any type of claim against your LLC.
It is important to know whether or not your business will be allowed to operate as an LLC. The following cannot be an LLC:
- Any business that is in the banking sector, trust or insurance
- Architects, accountants, physicians, or licensed healthcare workers in certain states, including California
If you need help with owning an LLC, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with, or on behalf of companies like Google, Menlo Ventures, and Airbnb.