LLC: Limited Liability Company
LLC: Limited Liability Company
LLC: Limited Liability Company
WHAT IS AN LLC?
It's not often that a completely new form of business bursts on to the business world - especially one that is sanctioned by the IRS - but the LLC is exactly that - and more!
The Limited Liability Company (LLC) is one of the newest and most exciting forms of business entities now available in all 50 states and the District of Columbia! LLCs give business owners the tax advantages and flexibility of a partnership; while providing the limited liability protection previously unique only to corporations - protecting the business owner(s) form business debts and claims.
LLCs grew form the desire to enjoy the protection of a corporation without all the complex rules that apply to corporate structures. In a nut shell the founding idea was to enjoy the tax status and ease of daily operation of a partnership with the legal liability protection unique to corporations.
Initially, states and businesses were slow to jump on the LLC bandwagon without clarification form the IRS as to how the LLC would be taxed - as a corporation or as a partnership.
Wyoming enacted the 1st state LLC legislation in 1977 with Florida following in 1982. It was not until IRS Ruling 149-76 declared that an LLC formed under the Wyoming statute was eligible for partnership tax status that all 50 states plus the District of Columbia enacted LLC legislation.
January 1, 1997 the IRS once again gave its approval to the LLC when it eliminated its previously complicated business entity tax classification regulations and declared LLCs should be taxed as sole proprietorships or partnerships (depending on the number of owners). Additionally, the IRS now allows LLCs to elect corporate tax status by simply filing IRS form 14932.
The LLC business model has created a business entity with the limited liability of a corporation and the tax simplicity of a partnership. Better yet, the LLC has received the blessing of the IRS.
BENEFITS OF THE LLC: Liability
An LLC is the only business entity other than a corporation to provide personal asset protection form business liability to all of its owners.
An LLC provides protection form liability for its owner(s) to protect their assets. If you are currently operating a business as a sole proprietorship (one owner), or a partnership, you are personally responsible for the total liability of your business.
If a judgment is entered against your sole proprietorship or partnership business, - it is entered against you personally - against your home or any other property you may own.
By choosing the LLC model for your business, you are personally protected form the potential liability of a sole ownership or partnership business. No one can attach your home, car, or your personal property if you lose a lawsuit against your business or your business simply fails.
The primary benefit of the LLC is protection. Protection of your personal assets. LLC status protects your personal assets form the creditors of the company, even if you are the sole owner.
The IRS has recognized the LLC as what is called a "pass through" tax entity. Simply put, the profits or losses of the LLC "pass through" the business and are shown and taxed on the individual tax returns of the owner(s) on a basic form 1040. The business is taxed at the individual tax rate, not the separate business level of a corporation.
Ease of Doing Business: LLC owner(s) are referred to as "members" and are similar to the familiar "stock holders" of a corporation. Members may be individuals or separate legal entities such as partnerships or corporations.
Very much like the corporate structure, LLC members invest in the LLC and receive an ownership percentage in return for their investment. Their ownership percentage(s) determine(s) the distribution of profits and losses, or the division of assets if the LLC is sold or liquidated.
HOW MANY PEOPLE DOES IT TAKE TO FORM AN LLC?
In most states only one (1) person is required to form an LLC - YOU. Even in 2 member states, you can simply bring your spouse or 'partner' in as the 2nd member.
How Are Profits & Losses Distributed?
An LLC is owned by its members. Most states permit 1 owner LLCs, while about 20 states require 2 members to form an LLC.
An LLC allows flexible distribution of profits and losses. An LLC does not require the distribution of profits and losses proportionate to the member's capital investment in the LLC.
You may choose to divide up the LLC's profits and losses any way you wish - under the same guidelines as in a partnership. Return to FAQ
Which businesses benefit form forming an LLC?
Small start-up companies. Most new businesses want to pass any possible losses of the first few years along to the owners to deduct against their other personal income, such as their salary earned while working for another company while starting their own business. An LLC provides the 'pass through' tax benefits allowing new businesses to do just that - pass along any early year(s) losses to the business' owner(s).
Existing partnerships.
Only the LLC offers pass through tax benefits for business income while at the same time protecting all of the owners form personal liability for business debts; in contrast to the limited partnership which only provides the pass through benefits to its limited partners - not to all of the partners.
Businesses holding property that will appreciate such as real estate.
An LLC as a true "pass-through" tax entity allows a business holding appreciating assets to avoid the double taxation of a regular "C" corporation.
A "C" corporation and its shareholders are subject to double taxation on appreciation when the assets are sold or liquidated because taxation occurs at both the corporate and individual tax level. Return to FAQ
What is the difference in an LLC and other business forms?
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LLC | Sole Proprietorship | General Partnership | Limited Partnership | "C" Corp. | "S" Corp. |
Who owns the business? |
member(s) | sole owner | general partners | general + limited partners | shareholders | shareholders |
| Who runs the business? | member(s) | 1 owner | general partners | general partner(s) only | board of directors | board of directors |
| Personal liability for business debts? | none | sole owner personally liable | general owners personally liable | only general partners personally liable | none for shareholders | same as "C" |
| Amount of paperwork and legal formalities? | start up filing | minimal | minimal | start up filing | start up filing, bylaws, annual shareholders' meeting | same as "C" |
| Limits on type of business? | any lawful business (some states prohibit forming banking or insurance) | any lawful business | any lawful business | any lawful business | any lawful business (some states prohibit forming banking or insurance) | same as "C" |
| Number of owners? | 1 or more (some states require 2) | 1 | minimum 2 general partners | minimum 1 general + 1 limited partner | 1 or more (some states require 2) | Same as "C"; No more than 75 shareholders |
| Source of start up money? | member(s) may invest with promise to perform services or contribute cash in the future | sole owner | general partners | general + limited partners | initial shareholders (some states don't allow investment with promise to perform services or contribute cash in the future) | same as "C" BUT all stock must be based on the same 'investment' type |
| Who generally finds this is the "best" way to do business? | owner(s) who want benefits of limited liability + pass through taxation of sole proprietorship; particularly for smaller, privately held businesses | 1 owner who wants manager + legal autonomy; (owner is liable for business debts) | joint owners not concerned with personal liability for business debts | joint owners who want partnership tax benefit + some non-managing investors; (general partners liable for business debts) | owners who want limited liability, ability to split income, + separately taxed business | owners who want limited liability, individual tax rate to apply to business income; (requires initial and ongoing "S" corp. requirements) |
| How business profits are taxed? | individual tax rates of all members (same as sole proprietorship)(unless LLC elects corporate tax rate) | individual tax rate | individual tax rate of general partners | individual tax rate of general + limited partners | split up and taxed at corporate rates + double tax at individual tax rate of shareholders | individual tax rate of shareholders |
| Tax-deductible fringe benefits to working owners? | can get benefits of sole proprietor, partnership, or corporation (depending on choice of tax treatment of LLC) | 1 owner may set up IRA, Keogh, + may deduct a portion of medical insurance premiums | general partners + employees may set up IRA, Keogh, + may deduct a portion of medical insurance premiums | same as general | full tax-deductible fringe benefits for employee-shareholders; fully deductible medical insurance premiums + reimburse employees' medical expenses | same as general partnership, BUT employee shareholders owning 2% or more of stock are restricted form corporate fringe benefits under partnership rules |
| Deductibility of business losses? | losses pass through to individual member(s), just as in a sole proprietorship | losses pass through to individual | partners may use losses to deduct other income on individual tax returns if "at risk" for loss or debt | same as general partnership, but limited partners may only deduct "non-recourse debts" | corporation may deduct business losses (shareholders may NOT deduct losses) | shareholders may deduct share of corporate losses on individual tax returns, but must comply with special limitations |
| Effect if owner dies or departs? | dissolves if 1 owner(continues if remaining members vote to continue the LLC | dissolves automatically | dissolves automatically unless otherwise stated in partnership agreement | same as general | no effect | no effect |
| Limitations on transfer of ownership interest? | operating agreement and some states may require consent of non-transferring members | free transfer | consent of all general partners usually required | same as general | transfer of stock may be limited under securities laws or Articles of Inc. or Bylaws | same as "C", but limited to persons and entities qualifying as "S" corp. shareholders |
| How needed capital acquired? | capital contributions of members + bank loans to LLC | owner's capital + personal loans to owner backed by owner's assets | partner's capital + personal loans backed by partner's assets | investment by limited partners; bank loans backed by general partners' assets | outside investors, bank loans, may go public | Same as "C" (with some restrictions) |
| Sale of ownership interests subject to fed and state securities laws? | not if all member(s) are active in business | generally, not | generally, not | issuance or sale must qualify for securities laws or for securities laws exemptions | issuance or transfer must qualify for securities laws or for securities laws exemptions | same as "C" |
DO I HAVE TO HIRE A LAWYER TO FORM AN LLC?
NO! You can form your LLC entirely without the expense of hiring a lawyer by using our services to handle the administrative paperwork required to form an LLC. We offer services at low cost because we are not lawyers and do not give legal advice. Instead, our service is limited to helping you inform yourself about the procedures that affect your life (and your business), so that you can make your own informed decisions and providing the public an easy and inexpensive way to handle routine procedures by offering quality document preparation and providing the procedural information you need to process your paperwork solving your own routine legal problems without a lawyer.
WHAT DOES IT COST TO FORM AN LLC?
Each state has a set fee charged by the state for filing the Articles of Organization, establishing an LLC. See the list of individual "State Fees.
WHAT IS THE PROCEDURE FOR FORMING AN LLC?
Our service makes the paperwork for forming an LLC as simple as answering a few questions on the online order form. The form gives us all of the information necessary to complete your paperwork to form an LLC in your state.
You Make the Decisions, We Do the Paperwork. We handle all of the paperwork details for forming your LLC, by processing the information/order form and completing all of the paperwork to form your new LLC in your state.
Our document preparation service is a one time $149 fee. We return to you the completed Articles of Organization, ready to be signed and mailed to the Secretary of State for filing - we'll even include the envelope pre-addressed to the Secretary of State in the your state. You'll include the state's fee when you mail the paperwork to be filed. It's that simple.
The only other fee you are required to pay, is the fee charged by the Secretary of State for forming an LLC within the state. The "State Fees vary form state to state.
You will receive copies of your filed paperwork and a file number with
confirmation of your LLC filing form the Secretary of State's office. The
average time is approximately 30 days form the day you mail in the paperwork
to the Secretary of State, until you receive the filed copies form the Secretary
of State as "proof" that your LLC has been formed.
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