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.
While operating a business it is advisable to have a legal form for many reasons. Essentially your business should have a separate identity from that of your person to keep things in perspective. The business operations, its success or failure can be effectively monitored. Moreover, keeping a separate book of accounts will help in filing yearly tax returns. Formation and operation of legal business forms are governed by state statutes.
The legal forms for operating a for-profit business are Sole Proprietorship, Partnership, Corporations and Limited Liability Company. Each legal form has its risks and benefits. Sole Proprietorship is suitable for an individual operating a business without a great deal of risks or potential liabilities. If you are jointly operating a business with two or more persons, partnership is suitable. Both these forms of business are simple to form and easy to operate. The inherent risk in proprietorship or partnership is that the business owners are personally liable for all business debts.
Limited Liability Company or LLC and Corporation offer limited liability protection to business owners. They are not personally liable for the business’s debts or obligations. Forming a LLC or a Corporation requires compliance with state laws. To set up an LLC or a Corporation you have to file certain documents with the state as required by the state statute and pay a filing fee. You may have to pay a regular yearly fee to the state for the maintenance of these business entities.
Corporation has a separate legal existence from that of its share holders. In the eye of law, corporations are ‘persons’ and are treated as such. Due to the separate legal entity status, the office bearers of the corporation are obliged to conduct the business operations strictly in accordance with the regulations governing corporations. LLC has comparatively more flexibility in business operations. While it has the personal liability protection as in a corporation, it offers the flexibility and taxation benefits of a partnership or sole proprietorship.
How to form an LLC depends on the state in which it is registered. Rules and regulations on how to LLC vary in each state. The basic requirement in all states is to file articles or a certificate of organization and pay a filing fee. Some states require an operating agreement and publication of the intent to form a LLC additionally to that of the articles. LLC is not a tax classification in the Revenue Code. LLC’s can elect to be taxed as any of the other tax classifications which is convenient and beneficial to its business owners.
Limited Liability Company is relatively a new form of legal business structure. Now all the 50 states allow Limited Liability Companies (LLC) to register as a business. The business owners of LLC are termed ‘members’. LLC can have single or multiple members. LLC is formed under the state statutes. There are variations in rules and regulations governing the formation and conduct of LLC in different states. LLC definition is that it provides the limited liability protection offered by a corporation with the operational flexibility of a partnership. LLC are not a tax classification for federal or state tax laws. LLC taxation can be according to the member’s choice. The members can elect to be taxed as a partnership, C or S Corporation.
The basic guidelines for how to LLC formation is
Name availability: Your LLC needs a name to operate under. You have to check whether the name you have chosen is actually available for use. The issue here is that the name you have chosen must not be identical to that of an existing business. Your option to check whether the name is in use is to consult your state’s agency handling LLC registrations or search online resources. The name must contain the words ‘Limited Liability Company’ or ‘LLC’ or such other abbreviations that conveys the company’s limited liability status. Some word or terms such as corporation, bank or insurance or others specified by your state are prohibited from being the part of a LLC name.
Articles of Organization: Some states call this as Certificate of Organization also. For an LLC to come into existence in any state, this document must be filed and the filing fee paid. The Articles or Certificate must contain all the critical information regarding the LLC.
- Proposed name and address of the LLC
- Name and addresses of all the initial members
- Name and address of the resident agent or agent of service of process.
- Purpose of LLC formation
- Business activity
- Membership interests (rights and responsibilities of the members)
The above information may vary with each state.
Operating Agreement: Only some states mandate that an LLC operating agreement also be filed along with the Articles. As a rule, this document is imperative in every LLC’s existence. It provides the LLC with individuality separate from its members. The basic information required is
- Membership interests
- Management policies
- Business ethics
- Membership transfer conditions
Public Notice: You have to issue a public notice on the intent to form you LLC. This is required in some states only.
