What Is a Term Company LLC: Everything You Need to Know
What is a term company LLC? This business structure is reserved for companies that have designated a specific number of years for their length of existence.3 min read
Term and At-Will Limited Liability Companies
At the beginning of formation, the owners of a term LLC can designate a term of 25 years in its articles of incorporation. The business will exist for that length of time.
At the end of the 25-year period, one of two things will occur: the LLC will cease operating or the company will continue doing business on an at-will basis. If a member (also referred to as an owner) chooses to disassociate themselves from the LLC or withdraw as a member of the business while a term LLC is working with a designated length of existence, it will not impact the company's existence.
When a company chooses to operate at-will, it does not specify a designated term of existence. The LLC will operate indefinitely. Unlike a term company, if a member of the limited liability company disassociates themselves, the LLC will be dissolved. This can be avoided if a percentage of the remaining members agree to the continuation of the company. The LLC's operating agreement should specify what the percentage of members must be to continue at-will in this situation.
About Limited Liability Companies
Starting a limited liability company is on the rise because an LLC is an easy-to-run entity that provides personal liability protection. An LLC offers several other advantages, as well.
One major benefit of an LLC is the tax process. The LLC pays no taxes. Rather, the owners pay taxes based on their ownership percentage of the LLC's profits and their individual tax bracket. This process prevents double taxation. Other advantages to forming an LLC include:
- LLC owners do not have any residency restrictions. Corporations do have this restriction.
- Owners have more flexibility in terms of profit sharing.
- An LLC has less frequent operational formalities compared to corporations.
An LLC may not be the best business structure for your business. It is recommended that you consult with a lawyer who has specialized knowledge of limited liability companies to help guide you in making the right choice when selecting a business structure.
LLCs are fantastic in many ways, but there are also several disadvantages to this structure. For example:
- Bringing in outside investors is not an option with an LLC.
- Generally, any stock options offered to employees will not come with the same tax advantages as a corporation.
- It is next to impossible to go public with an LLC.
- Some investors, such as venture capitalists, do not allow investments in an LLC.
- Converting the LLC to another business structure at a future date can be difficult and expensive.
Starting a Limited Liability Company
There are certain steps to take when starting an LLC. Depending on the type of business you will be operating and its location, the following requirements may be different for your state:
- Choose a name for the business. Most states require that a variation of "limited liability company" be included in the name. This can be something like "Limited Liability Co." or "LLC."
- Search your state's name database, which can usually be found at the Secretary of State's website, to confirm that the name you have chosen is available. Also, check for names that may be too similar to yours.
- Register the LLC name as a "fictitious business name" with the appropriate agency for your area.
- Create an operating agreement. Sign and date it.
- Write the Articles of Organization for your LLC.
- File the Articles of Organization with the office of the Secretary of State.
- Obtain the necessary permits and licenses for the LLC. Depending on your business type, you may need both local and federal permits.
Limited Liability Operating Agreement
An important aspect of an LLC is its operating agreement. Within the operating agreement, you will outline the management methods and rules to be applied to the company. An operating agreement is not required in all states. However, it is recommended that you create an operating agreement even if your state does not require it. Otherwise, your LLC will be subject to the default rules and regulations that your state imposes.
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