Limited Liability Company

A limited liability company (also known as an “LLC”) is a structural organization that many businesses choose to use as it combines the simplicity of pass-through taxation with the limited liability that comes with corporations.

I’ve heard of LLCs, but how exactly does pass-through taxation work?

The pass-through taxation works as though the profits and losses of the LLC pass directly through to the owners of the LLC. Unlike a corporation, an LLC is not a separate tax entity, meaning that the owners pay the taxes for the LLC.

Are there a minimum number of people needed to form an LLC?

No, there are not a minimum number of people needed to form an LLC. If you decide to form an LLC with yourself as the sole owner, however, you must be careful in your actions and documentation to keep your LLC from being considered a sole proprietorship.

Who are LLCs best for?

Organizing your business as a corporation or an LLC makes sense in two situations.

The business is engaged in a dangerous activity that makes it more likely to be sued or has the potential of racking up large amounts of debt.
The owners of a business have large amounts of personal assets that they want to shield from any potential liability associated with the business.

Are there any businesses that can’t form an LLC?

Businesses that are engaged in banking, trust and insurance are sometimes prohibited from forming as an LLC. Additionally, some states disallow certain professionals (architects, doctors, lawyers, accountants) from coming together to form an LLC.

How do I go about forming an LLC?

In most states, you will be able to form an LLC by following four (or fewer) simple steps.

Business Name: Locate a business name that is available (not taken by another company) and that conforms to your state’s rules regarding names for LLCs. Many state governments will tell you whether or not the name you have chosen for your LLC is a valid name under the state’s laws
Articles of Organization: File your paperwork, normally called the “Articles of Organization,” and pay the fee associated with the filing.
Operating Agreement: Make the operating agreement that will dictate how the LLC will be run. This normally lays out all the rights and responsibilities of all LLC members.
Publish a Notice: Some states require that an LLC take another step to make the business official, namely that the members must publish a notice to the public in a local newspaper of their intent to form an LLC.

Do I need an operating agreement?

Although many states do not require every LLC to be run by an operating agreement, here are some reasons why having one is a great idea:

It will establish rules regarding the sharing of profits and losses among the owners.
It will dictate how meetings are held as well as lay out the voting rights of all members.
It can help ensure that your business’ status as an LLC will be legitimate and more respected by a court when considering your limited personal liability.
It can possibly resolve conflicts between owners before they arise.
It avoids the default rules that would be imposed by the state absent an operating agreement.

How will my LLC be taxed?

Unlike corporations, LLCs are not considered to be a separate tax entity, meaning that the taxes pass-through to the owners of the business (like sole proprietorships and partnerships). The LLC, in general, does not pay income taxes for itself. However, the owners of the LLC must pay taxes on their share of the profits from the LLC on their personal tax returns.

LLCs may elect to be taxed like corporations, meaning that the LLC would pay taxes on its profits, instead of passing the taxes through to the owners.

What securities laws impact LLCs?

By definition, a security is an investment in a profit-making enterprise that is not run or controlled by the investor. Therefore, if you are planning on having more than one owner (member) in your LLC, then you may have to worry about securities laws.

If ownership interests in your business will be considered securities by the SEC, you must ensure that you qualify for an exemption before you take money from investors. If you cannot qualify for the exemption, you must register the sale of the interest in your LLC with the state and the federal SEC.