How to use a Book to Grow your Business

A limited liability company, or LLC, is a business entity that enjoys many of the characteristics of a corporation, including limited liability, while avoiding many of the more significant burdens imposed on corporations.  It also has  many of the characteristics of unincorporated entities such as partnerships and sole proprietorships.

The owners of a corporation are referred to as shareholders or stockholders; the owners of a limited liability company are referred to as -members-. An LLC formed by a single individual is usually referred to as a "single member LLC".

What Businesses Qualify?

Most businesses will qualify to form as LLCs. Banks and insurance companies do not qualify to form as LLCs.

Some states restrict professionals such as lawyers, accountants and doctors from forming as LLCs, or required the individual(s) to form a Professional Limited Liability Company (PLLC), for professional practices.

The LLC can be attractive to businesses which might otherwise form as S Corporations, but would either have too many shareholders to qualify, or wish to include owners who are not citizens or residents of the United States.  Including people who do not qualify to hold shares in an S corp will restrict the ability of the LLC to file for an S tax election.

Limited Liability

Members of a limited liability company enjoy protection from individual liability similar to that afforded to corporate shareholders. That is to say, if a business is sued or is unable to pay its debts, the creditors can ordinarily only reach the LLCs assets and cannot reach the assets of the members. While in most states the law is not yet developed, some states permit an action to "pierce the corporate veil" of an LLC and reach the personal assets of members who have engaged in wrongful conduct. Whatever the state of the law in any given jurisdiction, owners of an LLC should anticipate that if they use the LLC to advance their personal purposes or to perpetrate fraud, courts will hold them personally liable for the LLCs associated liabilities.

Also, individuals can be held responsible for their own negligence and misconduct, for actions intended to damage or defraud the LLC, and for debts of the LLC which they personally guaranteed.

Articles of Organization

When starting an LLC, you must prepare Articles of Organization, to be filed with the Secretary of State or other state department, along with a filing fee. Most states offer approved forms for completing and submitting articles of organization. Typically, the Articles of Organization include the name and address of the LLC, the names and addresses of the initial members (owners) or managers, and the name and address of the LLC's registered agent.

In some states, you must publish an announcement of the formation of your LLC, or the conversion of your existing business to an LLC, in a newspaper qualified to publish legal notices after filing your Articles of Organization with the state. You can usually find out if your local newspaper qualifies to publish your notice by inquiring with the state or with the paper itself.

The Operating Agreement

When you are starting an LLC, although generally not required by law, the members should create and approve an operating agreement for the LLC. The operating agreement governs the operation and management for the LLC, and can direct the manner in which profits are to be divided. It can also create procedures for the departure of LLC members, or the addition of new members, and the valuation of the LLC for purposes of buy-in or buy-out. It should also reflect the ownership interest of the members and their associated voting rights.

Without an operating agreement, the basic operation of the LLC will be governed by state law, which may not be advantageous to the LLC or the business it conducts. Under typical state law, if a member of an LLC quits, the LLC ceases to exist. Many LLCs would prefer that their operations continue even if a member departs, and provide for that contingency in their operating.

Unlike corporations, LLCs are not required to hold annual meetings or prepare annual reports. An LLC may nonetheless find it beneficial to voluntarily hold regular meetings and document in the form of written consent of action without meeting decisions of legal, financial and tax significance.

Annual Fees

Some states require that LLCs pay an annual franchise tax or registration fee.

Taxation

The income of a limited liability company passes through to its members, who report the income on their personal tax returns. For tax purposes, a single member LLC is treated as a sole proprietorship, and a multiple member LLC is treated as a partnership. The LLC itself does not ordinarily pay taxes on its own behalf as a separate entity. An LLC will ordinarily be required to file an annual informational tax return with the IRS.

The income members earn remains subject to income and self employment tax (Medicare and Social Security contributions), and members are responsible to pay those taxes at the end of the year. Members who do not play a role in the management of the LLC, but simply receive a share of the profits by virtue of their ownership interest, may be exempt from paying self-employment taxes. In most cases, members will be required to make quarterly payments of their estimated tax liability, to both the state and to the federal government.

LLC Taxed as a C Corporation abbreviated to LLC-C

It is possible for an LLC to elect to be taxed in the same manner as a C Corporation, in which case the LLC pays taxes on its profits at the corporate tax rate. As this election will last for a minimum of five years, and as there may be tax consequences for switching back to pass-through taxation, careful consideration must be taken before exercising this option, including the possibility that the business would be better served by becoming a corporation.

LLC Taxed as an S Corporation abbreviated to LLC-S

It is possible for an LLC to elect to be taxed in the same manner as an S Corporation, in which case its profits are not subject to double-.
You should discuss the manner in which your LLC will be taxed with a qualified financial professional.

Securities Law

For most LLCs, there are a relatively small number of owners of the LLC who also act as active participants in its management, and securities laws don't come into play. However, if an LLC intends to have owners who are not actively involved in the business, or sell ownership interests in order to raise capital, it may be required to follow certain procedures and registration requirements set forth in state and federal securities laws. Before engaging in that type of activity, it will benefit an LLC to obtain legal advice, and to try to qualify for any applicable exemptions to the securities laws.

Know Your Local Law

Before you opt to become an LLC, make sure you have a full understanding of the state laws which will govern your operations, including any limits on the duration of your LLC, and the amounts of any filing fees or annual fees associated with starting and maintaining an LLC.