A limited liability company (LLC) is a business entity that is created by filing articles of organization with a state, usually with the secretary of state’s office. This form of ownership is very advantageous for the small business owner because it provides the owners with limited liability and is easier to set up then a corporation.
Although many services will charge you a few hundred dollars to create an LLC the process is relatively simple and can be done without the assistance of a service.
Articles of Incorporation
The articles of incorporation are the formation documents for the LLC and are filed as a document available to the public to tell the state and anyone else who wants to know, what the company is about. The most frequently requested information for the articles of incorporation are:
- The name of the company
- How many members the company has at the time of organization
- The physical address and mailing address of the company
- The name of the organizer (can be someone other than the owners)
- If the company will continue indefinitely (perpetual) or end on a specific date
- The purpose or business the company will conduct and what powers it has
Every state has different requirements for what must be included in the articles of organization, but these examples are very typical of what is required. Some states will create the articles of organization for you online, all you have to do is enter the information and pay the fee. The amount of the filing fee depends on the state but are typically around $50-$150.
Most states also require you to designate a registered agent for your company. This is a person or entity that resides or has a place of business in the state and agrees to accept service of process for the company. If you do not live in the state there are companies that will act as your registered agent and perform the requirements as the registered agent according to the laws of the state for a yearly fee.
The other requirement for an LLC is to have an operating agreement. Although you don’t usually have to file this document with the state, it is necessary for things such as opening business bank accounts and obtaining loans. This agreement basically covers getting into business, operating the business, and getting out of the business. This is the document you use to determine what interest each person will have in the company, the powers of the company, and the share of profits and losses of each member is set forth.
One of the benefits of the LLC entity is that profits and losses do not have to be shared evenly. A member who puts in work instead of money, for example, may be entitled to only 30% of the profits but still remain liable for an equal share of the losses. This gives members flexibility to bring in members as investors who may have less liability, but share equally in the profits.
The LLC has limited liability for the members meaning they annot be held personally liable for the company’s debts. Many businesses will require members to sign a personal guaranty where a member agrees to be personally liable for the debt of the company, especially if the company is new in business.
Members may also be held individually liable for their own intentional torts. To maintain the LLC as a separate entity, members should always have separate bank accounts for the LLC and sign company documents as members of the LLC and not as individuals. An LLC is treated as a separate entity from its owners under the law therefore it’s important to make that distinction in record keeping.
LLC’s are not required to keep minutes or have annual meetings; however it’s never a bad idea to keep these kinds of records to show that the company is separate from its members. The operating agreement and state laws will provide the requirements for what records members must keep. Most states require that LLC’s file a report on its earnings on a biannual basis in order to keep the company active.
Failure to file the reports will result in the company being administratively dissolved by the state. If this occurs and members continue to do business under the LLC they risk being personally liable for the company’s debts.
LLC’s do not have stocks, but may issue member interest certificates to members representing the members interest in the LLC. LLC’s may also prepare resolutions, like corporations, for official actions such as opening bank accounts, securing loans or the buying/selling of membership interests.
By completing a form 8832 an LLC elects how it will be taxed. Most LLC’s choose to be taxed as a partnership which means the tax flows through the entity to the individual members. The individual members pay taxes on their share of the company’s profits or losses in accordance with the operating agreement. An LLC also has the option to be taxed as a corporation, or in the case of a single member LLC the entity may be disregarded altogether for tax purposes. For more information you can go online to the IRS’s website.
Disadvantages of LLC
An LLC is a very flexible entity that can be used by almost any type of business. LLC’s do have limitations, however and the laws surrounding LLC’s have been subject to a great deal of changes in the last few years. It’s difficult to go public with an LLC and to obtain venture capital because of the business structure. Many investors may be more comfortable with the option to purchase stock, because it’s a more familiar instrument.
Whatever entity you choose for your business, make sure to take advantage of professionals who can answer your questions such as attorneys and accountants. Small business incubators and associations are also excellent sources of information for new business ventures.