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What is an LLC (Limited Liability Company)
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A Limited Liability Company (LLC) is not a partnership or a corporation but includes features of both.
LLCs are structured like a partnership or a sole proprietorship but with limited liability protection similar to a
corporation.
Because an LLC is considered a separate entity from its owners, the owners cannot be held personally liable for debts and obligations of the LLC.
This is the principal advantage of an LLC.
LLC's provide all the liability protection of a C Corporation but with far less formalities.
For example, bankruptcy can have serious personal consequences for a sole proprietorship or general partnership.
However, if an LLC declares bankruptcy the owner's assets are considered separate from the assets of the LLC and are
thus protected from bankruptcy.
Each state has different rules governing LLCs.
There are usually special rules for foreign LLCs.
LLCs do not issue corporate stock.
LLC owners are called "members" not partners or shareholders.
The formation documents for LLCs are called Articles of Organization and must be filed with a state agency - usually the Secretary of State.
PCF can help you draft the Articles of Organization.
The IRS does not recognize an LLC as a classification for federal tax purposes.
LLC members can elect for the IRS to tax the LLC as a sole proprietorship, partnership, C Corporation, or S Corporation.
This decision may be made within 12 months after the LLC is created.
If a single member LLC does not declare a tax classification within the alloted time it is taxed the same as a sole proprietorship.
A multiple member LLC that does not declare a tax classification is taxed as a general partnership.
There is more information at the IRS web site.
Some features that make LLCs fifferent from S and C Corporations
- LLCs are not required to hold director and shareholder meetings
- A board of directors is not required
- The owners and managers may make all management and operation decisions
- Generally have more flexibility in the way that profits are distributed
- Require no corporate minutes or resolutions
- Owners do not have to be residents or citizens of the USA
LLCs may be governed by an Operating Agreement.
Operating Agreements may include requirements for profit sharing, ownership responsibilities and almost anything else that involves the management and
operation of the LLC.
Although Operating Agreements are not required in some states, it is highly advisable to have one.
PCF can help you draft an initial Operating Agreement.
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For more information, or if you're ready to form an LLC Online, pick a state from list below.
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