Facts About Setting Up a Limited Liability Corporation

A limited liability corporation (LLC) is a unique business structure that provides protection from personal liabilities and gives the tax advantages of a partnership. It has become very popular in recent years for small business that want to incorporate. Each state has its own specific requirements and setting up a limited liability corporation is quite simple and can be done in very little time and with minimal effort.

The very first thing you must do is to get a copy of your own state’s LLC Articles of Organization form. This form is available from the office of the Secretary of State and must be filled out completely with such things as business name, business purpose, office address, and names of initial members of the LLC. (Naming your business requires that you comply with all state rules so ask for a copy of your state’s rules for LLC business names.) In addition, ask if you must post a notice of your intentions to form an LLC in the local newspaper. If so, it’s a good idea to publish it before you file your LLC Articles of Organization form.

The next step is to submit your LLC Articles of Organization form to your Secretary of State. You also must enclose the appropriate filing fee which can range from $40 to $900. A few states also charge a corporate tax that must also be paid at the time of filing. Check with your Secretary of State to find out if you must pay this additional tax and to determine how much it will be.

Once you have completed the steps listed above, you will need to create an LLC Operating Agreement. This is especially important if you are not the sole owner of the business. This agreement documents, in detail, all of the financial and management rights and responsibilities specific to members of the LLC. Basically, putting this information in writing prevents any future complications down the road. It’s a good idea to write the LLC Operating Agreement before filing the LLC Articles of Organization form so that everyone knows, up front, what they’re signing up for.

Setting up a limited liability corporation can be done on your own or under the advice of an attorney. Each state has its own unique rules and regulations so consulting with an attorney and/or researching the internet beforehand will answer many of the questions you may have about incorporating in your own state.

The LLC Is the Best Business Structure for Small Businesses

The limited liability corporation (LLC) is the best business structure, for small businesses because it allows them to behave like a corporation when dealing with the public, but like an individual when dealing with the Internal Revenue Service (IRS). The corporate structure of the LLC provides the very important legal protection from claims against the owner’s personal assets, while the tax laws allow the LLC to choose a tax classification that is suitable for the business. To choose a classification, the LLC must file form 8832 with the (IRS) within 2 and a half months after registration.

In dealing with The IRS the LLC has choices about how to be classified for tax purposes. A single member LLC can choose to be classified as a sole proprietorship or a corporation. Classification as a sole proprietorship allows the business owner to report business transactions with the individual return on schedule C, avoiding the cost of preparing a separate business return. A multi-member LLC can choose to be classified as a partnership or a corporation.

The LLC provides an added level of flexibility in that the business can change its tax classification to suit the needs of the business and the owners. For example a single member LLC may choose the classification of sole proprietorship initially, when profits are small and there is no advantage to be classified as a corporation, but change its classification to a corporation at a later date when profits are larger, and tax avoidance strategies are needed.

There are some rules members of LLCs need to be aware of. Once the LLC is registered, the business owner has two and a half months to file form 8832 to choose its tax classification. After the LLC files the initial form 8832 choosing its tax classification, it can change that classification every 5 years. If form 8832 is not filed, the IRS will determine the tax classification of the LLC. In the case of a single member LLC, it will be classified as sole proprietorship and in the case of a multi-member LLC it will be classified as a partnership.

The structure of the LLC is perfect for a small business as it provides the business with credibility and the owners with legal protection from day one, but allows the business the flexibility of changing its tax classification with the IRS therefore taking the best advantage of the tax code.

The Advantages of a California LLC Business Structure

As a business owner, deciding on the structure of your company is one of the most important decisions you can make. Limited liability companies are a relatively new hybrid business entity. California passed The Beverly-Killea Limited Liability Company Act which allowed for LLCs to be created in California in 1996. Since their start, they have become increasing popular with business owners and for good reason.

An LLC is an interesting hybrid that has the best of different business structures rolled into one. It is a business structure where, as with a sole proprietorship or partnership, the losses of the company are reported on the business owner’s personal tax returns. Sole proprietorships and partnerships however, do not provide the owner any limited liability protection. With an LLC, as with a corporation, the owners are protected from personal liability.

Easier to Create and Maintain

An LLC has many advantages to the business owner. LLCs have all the advantages of a corporation (protection from personal liability), without the red tape and administrative costs in creating and maintaining a corporation. Because of this, they are a good option for the small business owner. Complying with corporate formation rules and the yearly maintenance that is needed is time-consuming and costly. There are statements and reports that need to be filed with the Secretary of State, and corporate books to be maintained. The stakes to maintaining a corporation are high, failure to do so means that a creditor of the corporation could theoretically “pierce the corporate veil” and come after the shareholder’s assets.

In contrast, the creation of an LLC is simple. All that is required to form an LLC in California is to file Articles of Organization with the Secretary of State and pay a filing fee. California also requires that LLCs create an Operating Agreement. The Operating Agreement is a written agreement between the members setting the guidelines and procedures of how the LLC will function. While there are no set criteria as to what the document should contain, typically it would include subjects as how the company will be managed, the amount of capital contributions from each member, and how profits and losses will be handled.

Favorable Tax Treatment

The IRS has different ways of viewing an LLC for tax purposes. For instance, an LLC with only one member is taxed as a sole proprietorship. If the LLC has two or more members it will be taxed as a partnership (unless the LLC has been elected to be treated as a corporation). Either way, the tax treatment for an LLC is preferable to that of a corporation. In contrast, C-Corporations are subject to double taxation. The corporation is required to pay a corporate tax, and then the money is taxed again as income to the individual shareholders. With an LLC, all the business losses, profits and expenses flow through the company to the individual shareholders. This also holds true with a corporation that files for S-election status. The drawback however, is S-corporations are complicated and costly to create and maintain. Further, Section 1361 of the Internal Revenue Code imposes significant restrictions on the ownership of S-corporations.

Owner’s Assets are Better Protected

Just as with shareholders of a corporation, LLC owners are protected from personal liability for business debts and claims. They are not individually liable for any debts or liabilities incurred while doing business for the company. Owner’s assets cannot be seized or sold to pay other liabilities for the company. This is not the case with a sole proprietorship or partnership, where the owner is responsible for any loss or debt, even if it means settling this debt with their personal assets.

For these reasons, the LLC can be a great option for some, by combining the best features of different business structures. While the LLC is a great option for some, choosing the right business entity is a complicated process. When in doubt consult legal counsel.