A Limited Liability Company is a business structure formed under specific state statutes. It is a legal entity separate from its owners (known as “members”). An LLC can be formed as a single-member LLC or a multi-member LLC and either member-managed or manager-managed.
The LLC is the simplest formal business structure to form and maintain. It offers some of the same benefits of a corporation, without the costs and complexity of compliance. Business owners seeking personal liability protection, tax flexibility and management options may find that forming an LLC (Limited Liability Company) will be an ideal choice for their business.
Benefits of forming an LLC
Other than operating a business as a sole proprietorship or general partnership, the LLC structure is the least complex and costly form of business to start and maintain from a state compliance perspective. The business registration paperwork to form an LLC is minimal, as are the ongoing filing requirements.
Personal liability protection
Because an LLC is considered a separate legal entity from its members, its financial and legal liabilities are also theirs. Therefore, if someone sues the company or the company is unable to pay its debts, the LLC members are generally not liable. Therefore, their personal assets have a lower risk of being seized to pay legal damages or settle debts than if the business were a sole proprietorship or partnership.
Tax treatment options
By default, an LLC is considered a “disregarded entity” for tax purposes. As such, income tax is applied in the same manner as for sole proprietorships and partnerships, with business income and losses carried forward to its members’ tax returns and subject to the members’ individual tax rates. An LLC also has other tax treatment options. Members can elect to have an LLC taxed as a corporation, with profits taxed at its corporate rate. Or members of an LLC can elect the S Corporation election, which allows the LLC to be pass-through taxed, but with the corporate benefit of a reduced tax burden for self-employment because members only pay Social Security and Medicare taxes on their income taken as wages. Members’ dividend income is not subject to self-employment taxes.
An LLC can be either member-managed or manager-managed. In a member-managed LLC, the owners handle the day-to-day management of the business. In a manager-managed LLC, the members appoint one or more managers to manage the business. In most states, an LLC can appoint LLC members to be managers, or it can hire someone else to do the job. The manager or managers of an LLC generally have the authority to make certain decisions and run the day-to-day operations of the company, while the members retain authority over more important strategic matters. Most states consider an LLC to be member-managed unless the formation paperwork indicates that it must be managed by a manager.
How to form an LLC
Filing Articles of Organization with the State
Formation of an LLC requires filing articles of organization with the state in which the LLC will operate. CorpNet can file an LLC in all 50 states to allow you to save time and money and ensure your documents are submitted accurately.
Obtaining an EIN
An EIN (Employer Identification Number) is a unique nine-digit number (similar to a Social Security Number) that serves as a form of identification for a business. An LLC must have an EIN to open a bank account, apply for permits and licenses, hire employees, and conduct other business activities. An LLC can obtain an EIN for free from the Internal Revenue Service. A company can also request CorpNet to handle the completion and submission of EIN paperwork on its behalf.
Create an operating agreement
An LLC’s operating agreement defines the roles and responsibilities of its members and managers. Even in states that do not require operating agreements, an LLC (especially one that has multiple members) may find one helpful to avoid misunderstandings about who should do what and who has the authority to make certain decisions.
Obtain business licenses and permits
An LLC may need to have various business licenses and permits to operate legally in the local or state area. Depending on the nature of the business an LLC will conduct, it may also need federal licenses. Business owners should check with the local municipality, county and state to see what requirements apply to them. CorpNet can also provide additional licensing and permitting information.
Start a business bank account
An LLC must keep its finances separate from those of its owners. Therefore, it is essential to open a business bank account and use it only for LLC purposes. LLCs that combine personal and business funds run the risk of “piercing the corporate veil” (i.e., breaking the separation between the LLC and its owners), which could cause the owners to lose their personal liability protection.
Keep the LLC compliant
An LLC must also pay attention to the ongoing compliance requirements it must meet to remain a legal entity in good standing with the state. Compliance obligations vary from state to state.
Some common examples of what many LLCs must pay attention to include:
- Tax filing
- License and permit renewals
- Filing annual reports with the state
- Conducting membership meetings and drafting meeting minutes
- Updating the status on significant changes to the business (e.g., change of address or adding a new member)