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.
A Series Limited Liability Company is a special form of business structure that provides limited liability protection to each individual constituent of an LLC. To elaborate, in a series LLC, each of the (multiple) series of companies is protected from the liabilities of the others. It is something akin to a corporation with subsidiaries. Generally series LLCs are formed to protect real estate investments. Each separate investment is constituted as an LLC and brought under a single entity. By doing this the specific LLC in the series is liable only to claims arising out of its own business. In this manner each investment is protected from the liabilities of other LLC’s in the series, essentially liability of one LLC does not cross over to the other series. The advantage of a series LLC form is that the legal and statutory obligations and administrative procedures can be performed as a single entity. There are limitations to this single entity filing though. If any of the series constituents has a member who is not a member of the founding LLC, it has to file returns and pay fees as a separate LLC. There are some tax benefits also in forming a series LLC. One among them is that if one of the series is using property of another for business purposes and paying rent, sales tax on the rent may not be applicable.
How to form a LLC series depend on the state statute where you wish to register your series LLC. Basically the requirements are almost the same as forming a normal LLC. An Articles or Certificate of Organization has to be filed and due fees paid. Series LLC should have a Limited Liability Company Agreement like that of the Operating Agreement in a normal LLC. Addition of new series or deletion of an existing series is uncomplicated. An amendment to the agreement would suffice. Each constituent of the series LLC should have a distinguishing mark that separates it from others. For example, XYZ LLC Series A or XYZ LLC Series B. Keeping the business of each LLC seperate in the series is imperative. You must maintain separate books of accounts, bank accounts and other legal documents and transactions to get the limited liability protection for each LLC. Ensure that all assets and contracts distinctively state the name of the series it belongs to. The transactions between the series must be in a comparable uncontrolled price method or a fair market price method and should be properly recorded.
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.
Starting a business as a Limited Liability Company in the United States is easy and convenient as the procedures involved are minimal and straightforward in their content. Limited Liability Companies or llc’s are the most suitable for small business entrepreneurs as they have the advantage of limited liability for the debts and action of the LLC as in a Corporation but with flexibility in management and pass through taxation.
Setting up llc depends on the statute of your state of domicile. Most states do not restrict ownership and an llc can be owned by a single or several individuals, other llc’s, corporations and even foreign entities. Though, business like banks, insurance companies or non-profit organizations generally cannot be set up as llc’s.
To form llc, the legal requirements and regulations of the state in which the llc is to be set up need to be complied with. Each state may have its own rules and regulations regarding the formation of Limited Liability Companies. The owners of an llc are termed as members rather than partners or share holders.
There are certain llc forms and documents for starting up a business in every state. The basic documents are an Operating agreement and Articles of Organization. The operating agreement is drawn up by the members which sets forth the functions of the business, members interest or investments, voting rights, profit/loss sharing ratio, management policies, rights and duties of members and the dissolution or termination conditions. Articles of Organization are the basic charter for your business to engage in a lawful business activity in the state of registration. It should contain all basic information about your business including but not limited to Name and principal place of business, nature of business, registered agent’s name and address, name and addresses of the principal officers and the know members of the entity. Some states term this as Certificate of Organization also.
Limited Liability Companies are not recognized as a classification for tax purposes. Llc taxation must be done as a recognized federal tax entity as that of a corporation, partnership or sole proprietorship. Members can elect to be taxed as any one of the recognized tax classifications by filing a form 8832 with the federal government. Llc taxation filing includes wage and tax statement (w-2, W-3) and Forms 941 to 944 if it has paid employees and 1040, 1065 or 1020 for profit or loss from business in accordance with the classification the business has elected to be taxed.
To Form LLC ‘s you just have to follow a few simple steps.
- Name Availability. The first thing that you’re going to want to do, so you don’t waste time with paperwork that doesn’t pan out, is check with the Secretary of State, in the state where your business is located, to make sure that someone else has not already taken your proposed business name. Most states give you an easy-to-use name search feature on their government site. I’ve come up with names that were so off-the-wall creative that I know where of my own creation (at least I thought) and then I’d check the state’s website and find out that they were already registered by someone else. No one wants to go through all the hassle of creating the LLC form or documentations for one business name and then realize after the fact that it’s taken. Step one should be to check the availability of the name that you’d like to use for your new business LLC.
- Articles of Organization. After you have verified with the state that your desired name is available for your Limited Liability Company, you’ll have to complete a very short form called articles of organization. Most states will accept this on one sheet of paper. You can usually find a sample form on your state’s website otherwise, just do a quick search online for “articles of organization templates”. Completing this portion of the limited liability formation process shouldn’t take you very long, especially if you are mirroring another entity that has already been formed; it is just a matter of changing names and addresses. After you are done preparing the articles then you’ll need to file them with your state and get their stamp of approval. This stamp will have a date, which is your official organization date and becomes very important if you ever need to prove the age of your entity.
- EIN. When you have completed your name search and gotten your state to date stamp your articles of organization, then you are ready to apply for your Employer Identification Number (EIN). An employer identification number is to a business, what a social security number is to a person. It’s simply an ID that the government uses to keep track of your business. Since each state might have several businesses with similar names, the federal government has to use numbers (that are not duplicated) in order to distinguish one business from another. Your EIN can be applied for online at IRS.gov. The application only takes 10 minutes and the number can be issued to you at the end of the application process. You will use this number for vendors, LLC taxation, banking and a host of other reason.
