The right form of legal business structure for your business depends on factors such as the business activity and its financial implications. Each legal form of business has risks and benefits. A sole proprietorship or a partnership is easy to form and operate. These forms require no statutory procedures to form and operate except for the permits and licenses necessary to operate business in your state. Sole proprietorship and partnership are ideal for businesses which does not involve personal risk and potential financial liabilities. The personal liability of a proprietor or partner (s) is unlimited towards business obligations or debts. If a claim or liability arises out of the business, your personal assets are in jeopardy.
Limited Liability Company or Corporation offers limited personal liability protection to its business owners. There are statutory procedures required to be complied with to form LLC or Corporation. State laws govern the formation and operation and each state may have different requirements. For forming a LLC or Corporation you have to consult the state agency handling incorporations and organizations. Usually business incorporations are handled by the Secretary of State or Corporation Commissioner’s offices. All states provide online information regarding incorporation or LLC formation and personal support over telephone or in person.
For forming a LLC in any state, the basic requirement is to file an article of organisation and pay the filing fees. You require a valid name to form LLC. Make sure that the name is not similar to another business in your state. Some states provide name availability check option and you may check on the internet also. The name as stated in the articles should end with ‘Limited Liability Company’, ‘LLC’ or another abbreviation which clearly states the limited liability status of the business. The articles of organisation must state all the critical information about the LLC members and the purpose for which it is formed. The articles should also state a person or entity as a registered agent with a local street address for process service. Some states may have more requirements for forming LLC. An LLC operating agreement is required as a part of articles by some states. Even if the operating agreement is not a legal necessity, it is advisable to have one for your LLC. It will provide your LLC a separate identity and establish the limited liability status firmly in the eyes of law. Publication of the intent to form the LLC is also a legal requirement in some states. Some states prohibit formation of LLC for business like banking, insurance or professions.
Limited Liability Companies or LLCs are suitable for small businesses with considerable business volumes. The limited liability of the business owner in an LLC protects personal assets from business obligations. Unless your business involves cross border transactions or you are planning to go public, there are few advantages in forming and operating your business as a corporation. LLC’s can operate like a corporation with the flexibility of a partnership. Business continuity can also be ensured if the members of the LLC choose to do so. The Operating agreement can structure the memberships in such manner as to be easily transferable.
Don’t get excited by the advertisements about the Delaware or Nevada corporations. Those are for the big corporations with muscle and money. Even if you set up an out of State Corporation, you will have to qualify to do business in your state. This entails additional expenses and you do not get the tax benefits you angled for with an out of state Corporation. Register LLC in your hometown and avoid a lot of hassles involved in out of state Corporations. Forming LLC in most states is quite simple. States encourage small business registrations and have simplified procedures for LLC formation. Check with the state department that deals with business registrations in your state on how to form an LLC. Generally business registrations are handled by the Secretary of State’s or Corporations Commissioner’s offices. Detailed instructions are available on all State websites.
State statutes govern the LLC formation. Rules and regulations and formalities may differ in each state. In all states the LLC needs a name to operate under.
Care should be exercised while choosing a name. The LLC name cannot be identical or deceptively resemble the name of an existing business. Databases and registries are available with states or on the internet and can be freely accessed to check the name availability.
The basic requirement in all states to register LLC is to file an Articles of Organization. Some states have additional requirements such as filing the LLC Operating Agreement and issuing a public notice about the intent to form LLC. A fee has to be paid in all states to register LLC, which vary in each state. The Articles or Organization should contain all essential information regarding the purpose and organization of the LLC. The Operating Agreement is imperative to the proper functioning of the LLC and to provide it with individuality from that of its members.
The LLC formation is a business formation that is recognized in all 50 states, but is not recognized at the federal level for tax purposes. A LLC formation is not a corporation of a partnership; it is a hybrid of the two. LLC formations combine the best features of partnerships and corporations, although you do not get all of the benefits. While some people might call a LLC a limited liability corporation, the correct terminology is a limited liability company.
In a LLC the owners of the LLC are not referred to as owners, shareholders, or partners, they are called members. With the LLC formation there is no limited to the number of members they LLC can have. The members of the LLC can be individuals, corporations, or even other LLC’s. The one thing that you need to be aware of is the formation of LLC does not guarantee that the LLC will be around forever. The reason for this is the LLC formation is dissolved once one member dies or undergoes bankruptcy, whereas a corporation stays in business forever.
When forming your LLC many people often wonder if there is a specific state, you should use to form your LLC. The best LLC formation state is Delaware and Nevada. Most attorney’s like Delaware because it is a business friendly state, but Delaware also allows you to form a multiple series LLC. Nevada is another favorite state because they do not have a corporate income tax in the state. One thing you want to be careful of when forming a LLC in a different state is the legalities of doing this, even if your use a LLC formation company. Most LLC formation companies are going to do what is in your best interest, such as forming your LLC in the state that you will be doing business in, but others will take advantage of your ignorance, so be careful when using them. For example, in Nevada you can be on your way to income tax evasion if you do not properly set up your LLC in the state.
If you decide to go with the LLC formation for your business your business is going to have the liability protection of a corporation because the LLC exists as a separate entity like a corporation does. This means that members of the LLC are not going to be personally responsible for any business debts, unless they have signed a personal guarantee. Forming an LLC can be a bit complicated because of the paperwork that is required, forming a partnership or a sole-proprietorship requires less paperwork.
Another benefit of forming a LLC is the flow through taxation. When forming a LLC you will need to classify whether your LLC is a sole-proprietorship, partnership or corporation for federal income tax purposes based on the criteria that is set forth by the IRS. Most members that choose the LLC formation for their business do not choose to classify their LLC as a corporation for tax purposes because of the double taxation that corporations face, which is paying individual income taxes and corporate income taxes on the same income. If you elect to be taxed as a partnership or a sole-proprietorship your business losses, profits, and expenses are going to flow through the company to each individual member.
