What is a Limited Liability Company (LLC)
LLC's are ideal for small or one-person businesses because they
provide all the liability protection of a C Corporation but with far less legal formalities.
Limited Liability Companies (LLC) have become the most common type of new business since their introduction in the
last 30 years.
An LLC is a type of business that is authorized by state (not federal) law.
An 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 for the owners - similar to a
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, absent any fraud.
This is the principal advantage of an LLC.
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.
The formation documents for LLCs are called Articles of Organization and must be filed with the appropriate state agency - usually the Secretary of State.
PCF can help you draft Articles of Organization that are specific to your business.
Who owns an LLC
The owners of an LLC are called "Members" - not partners or shareholders.
Members make all business decisions.
An LLC may have an Operating Agreement that specifies the responsibilities of each Member.
The Operating Agreement may also specify Managers for the LLC.
Managers are responsible for the day to day operation of the LLC.
Members elect or appoint Managers and have the power to remove them.
Managers may or may not be Members of the LLC.
The liability to repay the obligations of the LLC is usually determined by the capital contribution of each Member.
The Operating Agreement may specify the obligations of each Member.
Members need not live in the state in which the LLC was formed or be citizens of the United States.
The number of Members that an LLC may have is unlimited.
Tax Considerations for the LLC
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 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.
More specific LLC tax information can be found at the
IRS web site.
Differences between Corporations and LLCs
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 that is specific to your business.
- 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
- Corporations live forever. LLCs may be terminated
Other Considerations for an LLC
Because an LLC is not a federal tax entity there are no uniform laws that pertain to LLCs from state to state.
If you plan to operate your LLC in two or more states, your LLC may be subject to different conditions and restrictions in each state.
Also, an LLC does not have the same level of protection against dissolution as a Corporation.
Unlike a Corporation, there are some circumstances that can cause an LLC to be terminated without the consent of all LLC members.
This may occur in the event of the death, withdrawal, or bankruptcy of a member of the LLC.
The laws governing dissolution of LLCs vary from state to state.
For more information, or if you're ready to form an LLC Online, click on any state in the list below.