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.
Choosing the right business structure for your business is important for many reasons. You have to consider a business form according to your unique situation that offers flexibility but provides personal liability protection. There are a few legal forms of business that offer both advantages. Corporations, Limited Liability Companies, Limited partnerships and Limited Liability Partnerships offer limited liability options to business owners. In limited partnerships, a general partner will have to assume personal responsibility for all the partnership’s business obligations. Limited Liability partnership limits personal liability of all partners but is restricted to specific professions or businesses in many states.
LLC definition is limitation of personal liability of the business owners. Limited Liability Companies offers limited personal liability and flexibility in management when compared to a Corporation. The member(s) of the LLC have the ease of management and administration of business as in a general partnership without its unlimited liability of partners. Another advantage with LLC is that you can choose the tax classification in which your business is to be taxed. If a single member LLC, you are by default treated as a sole proprietorship. Multiple member LLC’s can elect to be taxed as a partnership, C Corporation or an S Corporation.
Business owners in a Corporation are called share or stock holders and have limited personal liability. The share holder’s liability is limited to the capital invested by them in the business. Corporations are expensive to form and operate as the formalities and procedures involved are elaborate. Formal share holder meetings have to be held, the board of directors and officers elected, the proceedings formally recorded etc. Corporations can be a C Corporation or an S Corporation but the formalities involved are similar. A C Corporation is subject to corporate income tax whereas the S Corporation has pass through taxation. C corps have to pay tax on its income directly and when the profits are distributed to the share holders as dividend, they have to report the dividend as income in their personal tax returns and pay tax on it if applicable. S Corporation advantage is that, the income passes through to the share holders who pay income tax as their personal income.
The main difference between and LLC and a Corporation is that LLC’s are easy to form and operate when compared to a Corporation. In LLC vs. Corporation, LLC continuity is uncertain whereas the corporation has a separate existence from that of its share holders and ownership can be easily transferred. In LLC vs. S Corp, both has the advantage of pass through taxation but the operation of an S Corp. is formal and tedious in comparison.
Legal business structures are important while conducting business. Your business should have a separate existence from that of yours for many a reason. It is also important that proper structure is adopted to maximize benefits and minimize the business risks. Limited Liability Company (LLC) is popular with small business owners for this reason. LLC definition is that the business owners of the company have limited personal liability for business debts and obligations. In a Sole proprietorship or Partnership (except limited partnerships) the business owners are personally liable for all their business liabilities. This means that if the business defaults payments to creditors or lenders, or a claim arises during the course of business, the business owner’s personal assets can be liquidated to pay those creditors or lenders and to settle the claim. In an LLC, the business owner’s personal liability is limited to a preset amount and their personal properties are protected from liquidation for settling business obligations.
Starting a LLC is fairly simple and straightforward. All the fifty states now allow Limited Liability Companies through their statutes. The rules and regulations regarding setting up llc may differ from state to state. It is advisable to consult the state agency which deals with the registration of LLC’s. Usually llc forms are handled by the Secretary of State’s office. You have to file the required forms and pay due fees to register your LLC with the Secretary of State’s office.
For setting up llc, there are certain basic requirements. You need a name for your limited liability company to operate under. The name cannot be very much similar or identical to an existing company. The name must end with “Limited Liability Company” or its abbreviation “LLC”. Words like “bank” “trust” “insurance” and a few others are prohibited from being a part of the LLC’s name. Each state may have its own prohibited names list for LLC’s. Once you have an acceptable name, you file the Articles of Organization of the LLC and pay a fee to register the LLC. Most states have preprinted formats for Articles of Organization and all you need to do is fill and sign according to the instructions. Adoption of an Operating Agreement, which details the organization, operation and dissolution functionalities are critical in functioning of an LLC. The operating agreement bestows a distinctive identity to the LLC from that of the owners and provides clarity to the member’s rights and responsibilities.
Some states prohibit Limited Liability Companies from conducting certain businesses or professions. Limited liability Companies cannot operate banking or insurance businesses under their name.
LLC taxation is no different from any other business entity taxation. In reality, llc definition does not have an individual tax classification at the Federal or State level. Limited Liability Company owners can elect to be classified in any of the other business entity tax classification convenient to them. A single owner LLC is by default classified and taxed as a sole proprietorship. Multiple owners LLC can elect to be taxed as a partnership or a corporation. If elected to be taxed as a partnership, the income from business should reflect in each partner’s tax returns. When taxed as a corporation, tax on the business income has to calculated and paid through 1120 form. In Federal and state taxation, the differences in LLC vs S Corp taxes are that LLC can elect to be taxed as convenient to the members and beneficial to the business, while the S Corp passes through it profits to its shareholders who in turn reflects that in their personal tax returns and pays taxes accordingly.
A single member Limited Liability company when elected to be taxed as a “disregarded entity” (which means the LLC has no separated existence from that of LLC owner for tax purposes) profit from active trade or business is subject to self employment tax. The single member should report the business income in a schedule C tax form and pay the self employment tax based on Schedule SE Tax form. Where the LLC is not engaged in active trade or business and only a passive source of income such as income from investments or deposits, no self employment tax is payable. When a multiple member LLC engaged in active trade or business elects to be taxed as a partnership, the partners pay self employment tax on their share of profits and report the business income through a 1065 form. In an LLC elected to be taxed as a corporation, no self employment taxes are applicable on amounts paid as wages to the members but such payments will be subject to payroll taxes.
Where the LLC is treated as a disregarded entity or a partnership for tax purposes, no payroll taxes are applicable to profits distributed to the members and where no employees are engaged in the business. In LLC’s treated a C Corporation for tax purposes, any amount paid to members other than profits are subject to payroll taxes. For finer details on LLC taxation, consulting a corporate law firm will be prudent. They will be able to guide you on the most beneficial way to be taxed based on your business activities and LLC operating agreement.
Running a business has its benefits and risks. Choosing the right structure for your business is important in maximizing the benefits and minimizing the risks. If you are running a business that is almost a hobby and do not involve too many risks, you may choose to function as sole proprietorship or a partnership if two or more persons are involved. Both forms of businesses do not involve too many formalities to set up. Likewise, the tax return filing is also uncomplicated as the return of profit or loss from business can be filed along with the individuals or partners personal tax filings.
Limited Liability Companies or llcs are the most popular form of business entity for small businesses. Llc definition is in itself obvious regarding the liability of a member or owner for the business’s debts or risks. Llc provides protection to the members and limits their personal liability in businesses where risks are considerable. The main advantage of an Llc is that it has flexibility in formulating business and management policies. Forming an Llc and running it is expensive and strenuous than forming and running a sole proprietorship or partnership business. Forms have to be filed and fees paid for registration and other formalities and records of all business decisions and transactions have to be maintained.
Forming a corporation is necessary when the business contemplated is considerable in volume and the associated business risks are significant. Usually, large and medium sized businesses incorporate themselves to deal with complicated business issues and the statutes governing large businesses. Forming a corporation is costly and the formalities and procedures involved in a running corporation are cumbersome when compared to that of other business entities. Corporations are taxed on their profits directly and can retain the profits earned without distributing it among its shareholders which may help in saving some tax liability. How to incorporate yourself in the United States depend on the rules and regulations of the individual state where you plan to incorporate.
The differences in an Llc vs corporation are that, LLC are generally formed for small business operations as the structure offers flexibility in decision making and management. Whereas corporations are managed by a board or group of decision makers and involves formal procedures in making decisions and implementing policies. Owners or members of LLC’s are usually not free to divest or transfer their interest in the business. Stocks or shares in a corporation are easily transferable if not otherwise stipulated in the Articles.
The technical LLC definition is a limited liability company, but many people often refer to it as a limited liability corporation. Referring to an LLC as a limited liability corporation is wrong because corporations are a separate form of business that offers their own types of protection to the shareholders. The LLC definition uses the term company because businesses that are LLCs are not incorporated; they are simply a small business.
A limited liability company differs from a c corporation in many respects. One of the main differences between a LLC and a c corporation is stock certificates. Corporations can issue stock certificates to their shareholders because corporations are owned by shareholders. An LLC is owned by members and not shareholders so they do not have a need for issuing stock certificates. By the LLC definition, a LLC cannot go public like a c corporation can. A c corporation can have private shareholders, but it can also choose to take the corporation public later. If you wish to take an LLC public, you will need to form a corporation once you have decided to go public.
A LLC also differs from a sole proprietorship because it offers certain protections that a sole proprietorship cannot. For example, an LLC member is protected from any business debts or liabilities that are incurred during the course of business, unless a personal guarantee has been signed. If your business is considered a sole proprietorship, you will be personally responsible for any business debts and liabilities that are incurred during the course of business. If you have a sole proprietorship, your personal assets can be seized, such as your car or house, to help settle any business debts and liabilities that your business owes. A business partnership also varies from an LLC in the same manner.
Despite its differences with a c corporation and a business partnership, the best way to describe an LLC is a combination of the two types of business structures. The reason for this is that an LLC combines the advantages of a partnership and a c corporation together. By combining the advantages from each business structure, you get the best of both worlds because your business has the protection that is provided to corporations, but is less formal and more flexible than a corporation is. An LLC does not require you to have any bylaws nor does it require you to have meetings. An LLC does not need to have an operating agreement, which is similar to the bylaws of a corporation; it is still a good idea to have one in place.
Part of the LLC definition is the taxation of the LLC. According to the IRS, the LLC is not a valid business structure; it is not recognized by the IRS for federal tax purposes. If you choose an LLC for your business structure, you will need to classify your LLC as a corporation, partnership, or a sole proprietorship for federal income tax purposes. With an LLC, you are receiving a tax advantage because you are choosing how your business is going to be taxed, unless your LLC is automatically classified as a corporation under the IRS guidelines. Most LLCs choose to be taxed as a business partnership or a sole proprietorship because that allows for pass-through taxation and allows you to avoid the double taxation faced by corporations, unless you classify your LLC as an S corporation.
