LLC stands for “limited liability company.” Forming an LLC is the easiest way of structuring your company to protect your private assets in the event your company runs into issues.
A limited liability company (LLC) is an official type of company registration, usually with the Department of State in the state where the company is located. It serves mainly as an official organization that separates a firm from its owner(s) by law.
When an LLC is established, all of its contracts and most of its legal liabilities are directly related to the LLC and not to the owner(s). In comparison, with corporations and sole proprietorships, the owner is privately responsible for all legal liabilities including personal assets.
Do you need an LLC?
You may want to consider an LLC in order to protect your personal assets if your businesses face a reasonable risk of legal action or if there is a possibility of getting into business debt.
You can still form an LLC if you are a solo entrepreneur. Only one owner is needed to form one.
Reasons to form an LLC
The main reason for forming an LLC is to protect the personal property of the owner against the liability assumed by a business.
The LLC takes sole responsibility for most contractual disputes and other legal liabilities, so that the personal assets of the business owner (house, car, savings, etc.) are not at risk.
LLC protection can even (partly) extend to defending company owners against charge orders, where creditors directly sue members instead of the LLC. In this situation, the creditor is entitled to “capital distributions,” but since not all LLC members are required to receive capital distributions, this can sometimes mean no gain for the creditor.
How to form an LLC in the US?
1.Location
The first stage in the formation of an LLC is deciding which state to register in. Some say that, due to their corporate laws, the two best states for LLCs are Nevada and Delaware. However, if you don’t live in one of these, it is generally more costly and time-consuming to register there than to do so with your area of residence. For simplicity’s sake, the majority of small businesses should simply register in their home state.
Each state has different requirements, so businesses must ensure that they know exactly what they need to successfully register. The LLC will be recorded by the Department of State (or the Secretary of State) in the state where the business is registering.
Links to DOS/SOS websites are available here.
2.Company Name
Before you submit your papers with your State Department, you will need to select the name of the business.
The general rules require the name to be unique, to use nothing restricted by trademark or other laws, and to end with “Limited Liability Company” or, for short: “LLC” or “L.L.C.”
3.Articles of Organization
The first official step for registering an LLC is to file articles of organization with the Department of State. There is a simple yet quite specific format to follow, which again, is unique to each state. Make sure the format is followed or the registration will not be accepted. This is also the time for any filing fees to be paid. At this point in the process, many small businesses decide to hire professional services in order to ensure that the articles’ formatting is correct and all details are accurately followed.
4.Operating Agreement
In most states, an LLC’s operating agreement is made at the time of its registration. The purpose of this agreement is to name the company’s members, managers, tax partners, etc., and develop the terms and conditions of the equity distribution.
This is not something that you normally have to send to the Department of State, but it is not an easy move. In order to guarantee a healthy business and reasonable shares of the equity for all employees, especially when they leave the company, LLCs with more than one member must enter into an appropriate operational contract with an exit clause. For multi-member LLCs, it is highly recommended for a lawyer to assist in drafting the operating agreement.
5.Registered Agent
The designation of a “registered agent” is another requirement for the formation of an LLC. Simply put, the company must choose an LLC member as the person who will receive all of the official correspondence. For instance, the registered agent is the recipient of any subpoenas or other legal documents if legal action is referred to the LLC.
Advantages of an LLC
- Reduces responsibility for the managers and members.
- Superior protection from charge orders.
- Management flexibility.
- Flow-through tax: Profits are distributed to employees taxable earnings at their private tax rates. Double taxation is thus avoided.
- Extraordinary flexibility in the allocation of profits and losses to members.
Disadvantages of an LLC
- Some states, including California, charge an LLC fee.
- Some states do not allow LLC operations by professional groups (e.g. doctors or dentists).
- Single-member LLCs face reduced protection against assets. Many states do not honor a single owner’s asset protection for LLCs.
See Also
