Limited
Liability Companies
As
a business owner, you will be faced with many important
decisions, including what business structure to use
in your company formation. While many countries allow
the typical structures of sole-proprietorship, partnership,
or corporation for business ownership, Americans have
the ability to form a limited liability company.
What is a Limited Liability Company?
A limited liability company or (LLC):
- is
a type of business ownership combining several features
of corporation and partnership structures
- is
not a corporation or a partnership
- may
be called a limited liability corporation, the correct
terminology is limited liability company
- owners
are called members not partners or shareholders
- number
of members are unlimited and may be individuals, corporations,
or other LLC's
Advantages
of Limited Liability Company
Limited Liability: Owners of a LLC
have the liability protection of a corporation. A LLC
exists as a separate entity much like a corporation.
Members cannot be held personally liable for debts unless
they have signed a personal guarantee.
Flexible Profit Distribution: Limited
liability companies can select varying forms of distribution
of profits. Unlike a common partnership where the split
is 50-50, LLC have much more flexibility.
No Minutes: Corporations are required
to keep formal minutes, have meetings, and record resolutions.
The LLC business structure requires no corporate minutes
or resolutions and is easier to operate.
Flow Through Taxation: All your business
losses, profits, and expenses flow through the company
to the individual members. You avoid the double taxation
of paying corporate tax and individual tax. Generally,
this will be a tax advantage, but circumstances can
favor a corporate tax structure.
Disadvantages of Limited Liability Company
Limited Life: Corporations can live
forever, whereas a LLC is dissolved when a member dies
or undergoes bankruptcy.
Going Public: Business owners with
plans to take their company public, or issuing employee
shares in the future, may be best served by choosing
a corporate business structure.
Added Complexity: Running a sole-proprietorship
or partnership will have less paperwork and complexity.
A LLC may federally be classified as a sole-proprietorship,
partnership, or corporation for tax purposes. Classification
can be selected or a default may apply.
Setting-up a Limited Liability Company
All 50 states now allow the formation of LLC`s. Forming
your own LLC may not be as simple as a sole-proprietorship,
however, the process is much less than a corporation.
There are two main actions:
1. Articles of Organization: If you
plan to set up a limited liability company, you will
have to file articles of organization with the Secretary
of State and pay the required fees. Articles may be
prepared by a lawyer or filed yourself.
2. Operating Agreement: Although it is not
required in many states to draft an operating agreement,
it is advisable. Much like corporate by-laws or partnership
agreements, the operating agreement can help define
your company profit sharing, ownership, responsibilities,
and ownership changes.
Each state has different rules governing the formation
of a limited liability company. For instance, in North
Dakota, a foreign LLC is not allowed for banking or
farming. Some states will want a publication notice
with the local newspaper that a company has been formed.
Check with your local state office for further details.
This article should provide you with the basics of limited
liability companies and help guide your decision of
company business formation. Each state's laws differ
as well as each company situation. It is advisable to
seek tax and legal counsel to determine the best choice
for your individual circumstance.
At
Penney and Associates, we are committed to providing
the best possible service so your law related needs
are handled with the utmost professionalism.
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