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Quick links to questions within sections:
Forming an LLC LLC Name Requirements Taxation Operating
and Maintaining an LLC First, LLC does not stand for “limited liability corporation” and it is not a type of corporation at all. It is a separate type of business entity that is of recent origin. Its distinctive feature is that it combines the limited liability characteristic afforded shareholders in a corporation with the “pass through” tax treatment provided to partnerships and “S” corporations. An “S” corporation is one that has made an election
with the IRS under subchapter S of the Internal Revenue Code to be treated
for tax purposes as a “pass-through entity” – meaning that profits and
losses of the corporation are passed through to the shareholders (owners)
who report them on their personal tax returns and pay the tax at the
individual level. The corporation pays no federal income tax at the
corporation level. Both entities provide the benefits of pass-through taxation to avoid “double taxation” of profits as well as limited liability for the owners. An LLC has more operating flexibility and fewer restrictions than a S-corporation. For example, there are restrictions on the type and number of shareholders that are permitted in an S corporation that are not imposed on the member-owners in an LLC. Corporations must hold annual meetings of shareholders and follow certain other record keeping requirements not legally required of an LLC. On the other hand, shareholder-employees of an S corporation may pay less taxes overall than members (owners) of an LLC. It is generally less expensive to form an S corporation than an LLC, particularly in California where additional taxes are imposed on LLC’s. For more information on the comparison
between LLC’s and corporations, click
here.
No. In most states, LLC statutes afford the identical limited liability protection to members (owners) in an LLC as they do to shareholders (owners) in a corporation. Don’t be misled into thinking that the protection is any better or different in an LLC simply because this feature is part of the name. Is an LLC different than an LLP? Yes. “LLP” stands for “limited liability partnership.” It has many of the same characteristics of an LLC, but may be formed by a very limited number of businesses. In California, for example, only attorneys, accountants and architects may form LLP’s. They may not form LLC’s in California. Anyone who files completed Articles of Organization (also called “Certificate of Existence” or similar names) with the Secretary of State, and pays the filing fee, may form an LLC. In some states, certain types of businesses or persons, such as licensed professionals, may not operate as an LLC.
How many people are required to form and operate a business as an LLC? In all states other than Massachusetts and the District of Columbia, only one person is required to operate as an LLC. This is known as a single member LLC. Do I need an attorney to form my LLC? An attorney is not legally required to form an LLC. You can often file the Articles of Organization on your own by obtaining the form from the Secretary of State and following the instructions for preparing and filing the Articles. However, if you are unsure of the proper procedures or if you need advice about establishing or operating an LLC, you should contact your tax or legal advisor. You should also be aware that filing Articles of Organization is only the first step to legally create an LLC. Thereafter, other documents and filings must be completed in order to properly complete the formation of your corporation. If you fail to properly or timely complete the required steps after filing your Articles of Organization, you may be subject to monetary penalties and/or the suspension of your LLC’s rights or even the automatic dissolution (termination) of your LLC in certain states. Finally, if there will be two or more members in your LLC, it is advisable to have an operating agreement prepared to cover many issues that you will not want to be governed by your state’s default LLC provisions.
What are Articles of Organization? Articles of Organization is the document that legally creates an LLC, once submitted to and filed by the Secretary of State. Unlike sole proprietorships and general partnerships, which come into existence upon commencement of business, an LLC comes into existence by filing Articles of Organization and paying the necessary filing fee. What is an operating agreement? An operating agreement in an LLC is equivalent to a partnership agreement in a partnership. It covers such issues as capital contributions of members, obligations to contribute additional capital in the future, admission of new members, expulsion of members, and transfers of membership interests There are many options for handling each of these issues, depending upon the type of business involved, the composition of the members and their particular desires and objectives. Because of their complexity, it is advisable to consult an attorney to thoroughly review these issues and prepare a customized agreement. For more information on operating agreements, click here.
An LLC may have one or more managers
who are given the responsibility of managing the LLC on a daily basis.
Managers may be members, but state law does not typically require this.
If only one manager is appointed, he is essentially the same as a president
in a corporation. If two or more managers are appointed to run the LLC,
this is more like a board of directors in a corporation. Are there any requirements or restrictions in naming my LLC? Yes. Every state requires that a suffix to the name be used to indicate that the entity is an LLC. This can be “Limited Liability Company,” “LLC,” or another acceptable abbreviation.
How do I determine if my desired LLC name is available?
Will my LLC have to pay income taxes? No. LLC’s are classified as “pass through” tax entities, which means that they do not pay income tax on their profits. Rather, the income is passed through to the members who pay the tax on their individual tax returns. Will I have to file tax returns for my LLC? Yes. To comply with federal law, your LLC, like a partnership, must file a reporting tax return within 75 days of the end of its fiscal year, even though it will not have to pay tax. This return reports the taxable income of the LLC and the percentage of that income that is distributed to each member of the LLC. You will also have to file reporting returns in most states as well, generally on the same filing dates as for the LLC’s federal return. What taxes will I have to pay as an LLC? LLC’s, like any other employer, are subject to the payment of federal (and generally state) payroll taxes on salaries and wages paid to its employees. At the federal level, this includes Social Security and Medicare taxes as well as a federal unemployment tax. State payroll taxes often include unemployment taxes and a disability income tax. Payroll taxes generally need not
be paid by the LLC on the income paid to active members. However, the
members will be responsible for the payment of self-employment taxes
on their share of the LLC’s income in addition to paying federal and
state income tax.
Operating and Maintaining an LLC Does my LLC have to hold regular meetings of members? No. State laws typically dispense with the requirement of holding formal meetings of members, though several states require meetings unless the LLC’s operating agreement eliminates the meeting requirement While meetings may not be legally required, it may be necessary to hold meetings simply because of the importance of an issue and the desire to promote discussion among the members before making a decision What are my record keeping requirements? Unlike corporations that have specific record keeping requirements imposed by state law, LLC’s generally have few such requirements. Since meetings are typically not required, there will be not legal requirement to keep minutes of meetings. However, there may be other reasons for maintaining records. It is important to document the LLC’s important activities in the event of an audit of the LLC’s transactions by the IRS or other tax agency. These activities would primarily include the financial transactions of the LLC. Remember, like a corporation, an LLC is a separate legal entity and this must be respected by maintaining records separate from the transactions of its members.
Does my LLC have any ongoing filing requirements with government agencies? Yes. Your LLC must also file a periodic (normally annually) Statement of Information (or equivalent document), with the Secretary of State listing the LLC’s members and managers, physical address and resident agent. Some states also require annual financial reports from the LLC. Do I have to open a separate bank account for my LLC? Yes. The “separate entity” nature of an LLC requires funds to be maintained
separately from personal funds of the members. Even if you already have
a separate bank account for your business as a sole proprietor, it is
best to open a new bank account for your LLC since the federal tax number
for the bank account will be different once you operate your business
as an LLC. Is it okay to pay personal expenses from my LLC bank account? No. Unlike a sole proprietorship or a partnership, an LLC is a legal entity separate from its members. The members enjoy limited liability for the LLC’s legal obligations and debts as long as this separateness is maintained. If personal funds are combined with LLC funds so that they become indistinguishable, or if LLC funds are used for personal expenses, a court may hold the members personally liable for LLC obligations and debts.
If I form an LLC, can I still be held personally liable for the LLC’s obligations? Generally, members will not be held personally liable for the LLC’s obligations. There are exceptions, however. Many state laws specifically provide that the failure of an LLC to hold formal meetings cannot, by itself, be used as a basis for establishing personal liability of members. This is but one factor among many that a creditor of an LLC (or a corporation) may use to try and impose personal liability on owners. If the separate identity of the LLC is not maintained by its members, by commingling personal and business funds or in one of many other ways, it is possible that a court may disregard the limited liability protection and hold members personally liable in the same way that shareholders in a corporation would be held personally liable. To review detailed information about factors courts have considered in holding shareholders in a corporation personally liable, click here. Also, a member-employee will always
remain personally liable for damages caused by his own negligence and
intentional acts of misconduct, regardless of the existence of the LLC.
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