A limited liability company is a popular form of a legally registered entity used for business purposes. It is a hybrid structure somewhere between a corporation and a partnership. An LLC can make investments, own property, and operate a business.
The owners of an LLC are called its members. Members can be people, companies, trusts, and even other LLCs. Except for a single-person LLC, which is a special form for a small business owner, an LLC can have unlimited members. An LLC protects its members and manager(s) from having any personal liability for any financial losses generated by the business.
Birth and Usefulness of the Limited Liability Company
The first limited liability company (LLC) was registered in Wyoming in 1977. Wyoming pioneered the LLC concept and felt it was a useful legal entity format to attract businesses to the state. However, it took 13 years after that to have the LLC business entity accepted by the IRS. In 1990, Delaware was the first state to adopt the LLC structure into state law. Over the course of the 1990s, all the rest of the states followed suit.
Now, LLCs are the most common form of entities used by many businesses as their legal structures. LLCs may also be used to isolate the liability of a particular investment, such as a commercial real estate property, from other assets of the same owner. These LLC structures are one way to deal with premises liability and lawsuits. There are arrangements of “nested” LLCs that own pieces of other LLCs for the tax advantages and liability protection. Ask you tax professional and lawyer about your circumstances.
Tax Advantages of an LLC
LLCs may have tax advantages because the members can choose to have the LLC income taxed like a sole proprietorship, a corporation, or a partnership. This choice is made by the members (owners) signing a declaration form with the IRS.
LLC members pay Social Security and Medicare taxes by filing a self-employment tax form. Reporting self-employment income also lets you benefit from various deductions. An example is an education expense deduction for tuition, books, supplies and other costs for training or education that help maintain or enhance your skills for your current position. If you are self-employed and you have student loans, check with your tax advisor to see if you may benefit from this deduction.
To avoid double taxation, an LLC has pass-through taxation. This means the LLC does not pay federal income taxes. It is treated like a partnership (unless the owners choose otherwise) for federal taxes. This is the IRS default for an LLC.
For federal tax purposes, there is flexibility allowed in the distribution of the profits of an LLC. The profits may be allocated to the owners in any proportion, which does not have to reflect their ownership position in the LLC. Check with a tax professional to see how this flexibility can apply to your situation and perhaps reduce or manage your federal taxes.
Other Benefits of an LLC
The main attraction of the LLC is protection from liability. The members of an LLC decide whether they want their LLC to be member-managed or to have a manager who can be a non-member.
Members and managers of the LLC are not personally responsible for the decisions and actions taken by the LLC. Their personal assets are protected from attack by creditors in the case of an LLC bankruptcy and from a claim by a lawsuit.
LLCs do not have a formal Board of Directors and are not required to have board meetings. An LLC offers liability protection for its owners, just like the shareholders of a corporation. Unlike a corporation, an LLC cannot be charged with a crime.
Is it possible to create an LLC without using a lawyer?
Yes, in fact, most LLCs are created without using a lawyer for the initial filing process and registration of the articles of organization. It is possible to create an LLC and file it online using a particular state filing system. The only cost for filing is the fee charged by the state.
For those who need a bit of help with the process, you can get this done online for a low cost or free (plus state fees).
To form your LLC, instead of wasting money on a pricey lawyer, using a service like Tailor Brands is far more cost-effective. Form an LLC in a few minutes for $0 (plus the state fee).
If you don’t have a physical presence in the state where your LLC will operate, you will need to have a registered agent to accept mail and legal processes (serving of papers) on behalf of your LLC. There is an annual fee for registered agency services. Over 30 million people have used Tailor Brands to form their new companies. They make it easy and fun to start your new business.
Operating Agreement for an LLC
When you form an LLC and file articles of organization to register it with the state where it will operate, there is usually no requirement to file an operating agreement. That does not mean you do not need one. Except for a single individual LLC, which has only one owner, you will want to create an operating agreement for your LLC, if it has more than one owner.
Here are a few important items that an LLC operating agreement includes:
- The name of the LLC.
- The place (state) and date it filed articles of organization.
- The initial members and ownership percentages.
- Whether the LLC is member-managed or if it will have a manager(s).
- The name and contact information of the manager if the LLC has one.
- The name and contact information of the registered agent for the LLC.
- Members’ responsibilities and profit/loss allocations.
- What happens when a member wants to leave or sell their ownership?
- What happens for new members to be added?
- What happens upon dissolution of the LLC?
- Additional language about conflict resolution, such as an arbitration clause etc.
- Dated Signatures of Members, Manager(s), and their contact information.
Some boilerplate formats and templates can be used to create an operating agreement for an LLC. You can save money by doing some of the preliminary drafts yourself. However, these operating agreements may be quite complex, especially if you take on investors. You should at least have your draft reviewed by an attorney before signing it.
The Employment Law Handbook says, “When it comes to drafting contracts, many businesses require assistance from legal professionals to ensure that all the proper language and necessary clauses are included. Without expert guidance, contracts can be incomplete or ineffective, potentially leading to legal disputes and financial loss.”
You do not need a lawyer to form an LLC. You can do this yourself or work with a service like Tailor Brands.
It is possible to form an LLC and only pay the state filing fees to file the articles of organization. Nevertheless, you will still need a registered agent who maintains a physical office in the state where your LLC will be formed unless you have a physical office there (a P.O. box does not work).
You may want to consult with an attorney to help with the creation of an operating agreement for your LLC, especially if the LLC has multiple owners, investors, manager(s), bank loans, and other contractual agreements.
Disclaimer: Nothing in this article should be construed as tax or legal advice. Consult with a tax or legal professional.