Limited Liability Company or LLC is a new, but popular legal company formation that offers limited liability to its owners. The LLC first began in Wyoming in 1977, and since then has become a recognized business entity in all 50 states. A Limited Liability Company’s structure differs from that of a Sole Proprietor, DBA, Partnership or Corporation. Before you decide on an LLC, research your options, and make sure that you fully understand all of them.
The Basics of an LLC
A Limited Liability Company is basically a blend between that of a Sole Proprietorship or a Partnership and a Corporation. Like Corporations, it offers the business owners limited liability and protection from the debts and deeds of the corporation, unless the business owner has established a personal guarantee for that debt. Like Partnerships, and S-Corporations, LLC’s allow for pass-through income taxation thereby avoiding double taxation like that of a CCorporation. LLC’s are run by a document known as the Operating Agreement, and formed by filing Articles of Organization, which we will discuss in detail below. Limited Liability Companies do not have shareholders like Corporations; instead, the owners are called members which can be individuals, corporations, or other Limited Liability Companies. LLC’s are generally member-managed companies, but in some instances, the company chooses a business structure which allows for a manager-managed company. Limited Liability Companies have overtaken
S-Corporations as the nation’s leading business structure.
The Limited Liability of an LLC
The Limited Liability Company business structure offers many advantages to the business owner. The most recognizable being the limited liability that is offered to the owners and members of the business. Like that of Corporations, an LLC is recognized as a separate entity from the individual business owner for liability purposes. Members of the LLC cannot be held personally liable for the debts, actions or claims of the LLC unless they have signed a personal guarantee for the debt. What this means is that unlike Sole Proprietorships and Partnerships, the business assets and the owner’s assets remain separate. So, if the business is faced with a lawsuit, only the business assets are at risk. Creditors are not usually able to redeem their losses through personal assets such as the member’s home or car. This is of course, unless the businessowner or member has acted unethically, immorally, or illegally.
Taxation of an LLC
Like any other business entity, a Limited Liability Company is subject to federal taxation. Similar to that of the S-Corporation, a Sole Proprietor, or a Partnership, an LLC has the advantage of pass-through or flow-down taxation. This means that the company is not taxed at both the business level and the personal level, instead the tax liability is passed down from the company to the members or owners of the company. The owners of the business then report any profits or losses from the business on their personal tax returns, and are only taxed on the personal level. Some states, however, do have an annual tax assessed on the LLC. LLC’s also have the option to exercise taxation as a corporation, which may provide additional benefits to the business owner. LLC’s Members are not employees, and thereby do incur self employment taxes.
Filing for an LLC
Once you have chosen the LLC for your business structure, the next step is to file for your LLC in your home state, or the state that the business will be operating. Forming your Limited Liability Company is not as complex as filing for a corporation, but does require a few additional steps than a Sole Proprietorship or Partnership business.
1. The first step is to prepare your Articles of Organization. Your company’s name must be reserved by your state’s Secretary of State, and must be unique from any other LLC or Corporation and must have LLC or Limited Liability Company in the name. You must appoint a registered agent’s name and physical address to receive all federal and state correspondence, no PO Boxes are accepted. You determine if your company will be member managed or manager managed, as previously discussed. Some states also require annual reports to be filed to maintain the company’s status as an LLC. State laws vary so be sure to check with your state’s Secretary of State to ensure that you prepare your Articles of Organization correctly.
2. The next step is to file your Articles of Organization. These are to be filed with your state’s Secretary of State, and you must pay any applicable fees associated with the filing. Most states allow you to file these on your own, or you may request the assistance of a CPA or an attorney. Many states allow for online filing of the Articles of Organization. This is also a great time to apply for your Federal Tax Identification Number, which can generally be requested online at the IRS website.
3. Once your Articles of Organization have been filed, and your Federal Tax Identification Number has been received, you are ready to begin earning money for your business. You are able to open a bank account in the company’s name, hire additional employees, and obtain customers right away.
4. Though many states do not require you to draft an Operating Agreement, it is advisable in most situations. The Operating Agreement is a good way to establish the distribution of profits, the roles of each member, and who owns the company. This article is not designed to be a comprehensive guide to LLCs, but does provide an in depth overview of the structure and formation of an LLC. Since laws vary greatly from state to state it is recommended that you consult with a knowledgeable CPA or attorney to determine the LLC requirements of the state in which you reside. As with any business formation, choosing the right structure for your company is vital to your success. Review all of your choices prior to determining the operating system that works for your business.
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Thank you for this.