Every business has some or other financial implications during its tenure. The appropriate legal form of business depends on the degree or severity of these implications. Sole proprietorship or partnership is easy to form and operate but the personal risk of the business owner (s) in operating these forms is unlimited. When the transactions and risks involved in a business is considerable, it is necessary to choose a form that provides protection from unlimited personal liability. Corporations and Limited Liability Companies offer the personal liability protection to its business owners.
If the primary objective of the business form is personal liability protection, LLC form will serve the purpose. Forming LLC or Corporation needs certain legal formalities to be complied with. However, corporations are high maintenance business forms. Unless the business owners do not foresee considerable growth or intend to take the business to the public, forming and maintaining a corporation is not worth the hassle. Another plus for forming LLC is in LLC Taxation. Corporations have to file an individual tax return as a legal entity or ‘person’ and pay state and federal taxes directly. Again, when the profits are distributed as dividend among the shareholders, they have to declare it as personal income and pay tax. Sort of double taxation. The members, as the business owners of an LLC is called, can elect to be taxed as sole proprietorship, partnership or even a corporation, whichever is most beneficial to them.
How to LLC formation, the state laws regulate the formation and operation of LLCs. Each state has different rules and procedures for incorporation or organization of an LLC. Refer to your state LLC regulations to understand the requirements for forming and operating LLC. In all states one basic requirement is filing the Articles of organization. The nomenclature may change in each state but the purpose is the same. An available valid name has to be chosen for your LLC. Then file the articles of organization in that name and provide all the information in the articles as required by the state. You need a person or entity with a local address to act as your registered agent and that person’s written consent to act so must be provided. Some states stipulate an Operating Agreement duly executed and signed by the proposed members as a part of the business registration process. Even otherwise, an operating agreement is beneficial to the business in many ways. It will provide clarity to business’s operational and organizational structure and a separate identity from that of the members. A publication of the intent to form the LLC may be required in some states.
