Limited Liability Company (LLC): Formation, Capital Structure Laws, and Liabilities

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 What is a Limited Liability Company (LLC)?

A limited liability company (LLC) is a business entity that offers the benefits of both a corporation and a partnership. In addition to corporations and partnerships, other business entities, such as sole proprietorships and cooperatives, exist in the United States.

One of the primary advantages of a corporation is that the owners are shielded from personal liability for the corporation’s debts and legal claims made against it. If someone files a lawsuit against a corporation and the suit succeeds, the corporation pays any damages to its assets, and the owner’s personal assets are unaffected. However, one of the downsides of a corporation is double taxation, where corporate profits are taxed at both the corporate and individual levels.

An LLC offers the same protection for owners’ personal assets as a corporation but with the benefit of avoiding double taxation. Unlike a corporation, an LLC is not taxed at the entity level. Instead, profits and losses are passed through to members, who report them on their tax returns.

However, one potential downside of an LLC is that owners can be held personally liable for their own negligence. For example, if an owner of an LLC is found to have acted negligently in the course of their work, they could be held personally liable for any resulting damages.

How is a Limited Liability Company Different from Other Business Forms?

LLCs’ unique structure sets them apart from other common business entities.

One of the most significant advantages of an LLC is that income is only taxed once, unlike in a corporation, where income is taxed at both the corporate and individual levels. Instead, income generated by an LLC passes through the company and is taxed only at the individual member level. This tax structure is similar to that of partnerships, sole proprietorships, and limited partnerships.

LLCs also differ from corporations in terms of ownership structure. Individuals own LLCs, while shareholders own corporations. This difference can affect the way decisions are made within the company and the level of control each owner has over the business.

In terms of liability, LLCs differ from partnerships and sole proprietorships. Partners are personally liable for the partnership’s debts, including debts incurred by other partners. This means that if the partnership cannot pay its debts, creditors can go after the personal assets of individual partners to satisfy the debt. However, LLC owners are generally not personally liable for the debts or liabilities incurred by the LLC. This protection allows LLC owners to manage the business without worrying about losing their personal assets.

The unique structure of LLCs makes them a popular choice for small businesses and startups. By protecting owners’ personal assets and offering a simple tax structure, LLCs can help entrepreneurs focus on growing their businesses without unnecessary financial risks.

Who Should Form a Limited Liability Company?

Forming an LLC can be a wise choice if you want to own a small business. By creating an LLC, you can protect your personal assets and limit liability to the resources of the LLC itself. If you are sued, you will not have to pay out of your personal assets.

In addition to liability protection, forming an LLC requires minimal paperwork and costs compared to other business entities, such as a corporation. The formation process involves filing a document called “articles of organization” and paying a fee to the state, typically smaller than the fee required for forming a corporation. LLC formation usually requires less paperwork to be filed with the state.

Managing an LLC is also relatively simple. LLCs can develop an operating agreement, which outlines how the LLC will be governed, including how profits will be allocated and what members’ votes are needed for specific actions. The operating agreement can also address how the LLC may be dissolved, how disputes among LLC members are to be resolved, and what happens if an LLC member dies or becomes incapacitated.

Additionally, keeping track of LLC income and expenses is easy, as separate tax return filing is unnecessary. Members and managers report income and expenses on their tax returns.

What is the Process for Forming a Limited Liability Company?

When forming an LLC, you must follow several steps to ensure your business is properly established and compliant with state laws. The steps typically include the following:

  1. Determining who will be members of the LLC: An LLC can have one or more members, and these members can be individuals, corporations, or other LLCs.
  2. Creating a unique business name: When choosing a name for your LLC, it’s important to ensure it is unique and not already used by another business in your state. You can search for available business names on your state’s Secretary of State website.
  3. Filing the articles of organization: This document is filed with your state’s Secretary of State and typically includes basic information about your LLC, such as its name, address, and the names of its members. Some states may also require you to list the LLC’s purpose and the name of its registered agent.
  4. Filing an operating agreement, if required by state law: An operating agreement is a legal document that outlines your LLC’s ownership and management structure. While not required in all states, an operating agreement is recommended to establish rules for decision-making, allocation of profits and losses, and other important aspects of your LLC.

What Requirements Are There In Filing For an LLC?

When forming an LLC, be aware of the additional filings and taxes required by your state. In many states, an initial information statement must be filed within a short period of time after the articles of organization are filed. This statement typically includes the names and addresses of LLC members and managers and requires a fee to be paid to the Secretary of State.

In addition, some states require periodic statements of information to be filed every one or two years. These statements ensure that any changes to the initial statement are reflected in subsequent filings.

LLCs may also be subject to franchise taxes filed with the state’s Franchise Tax Board (FTB). State and federal employment taxes must be paid if an LLC has employees. LLCs must also pay unemployment insurance taxes, and they are responsible for collecting and paying sales taxes.

An LLC formation lawyer can guide you on what formation documents are needed and how to complete them. They can advise on any additional filings or taxes your state requires and ensure that your LLC complies with all applicable laws and regulations.

Do I Need an Attorney to Help Me Form an LLC?

While it is possible to form an LLC without an attorney, consulting with a legal professional can ensure that it is properly established and compliant with all state laws and regulations.

Working with an experienced attorney guarantees that your LLC is properly structured, your personal assets are protected, and your tax obligations are met. Additionally, an attorney can help you navigate any legal issues that may arise as you grow your business.

LegalMatch has a vast network of attorneys who handle LLC formation and can provide personalized legal advice to help you make informed decisions about your business. Our service is fast, free, and confidential, and we can connect you with attorneys in your area who are ready to help.

To get started, simply submit your case details through our online platform, and we’ll match you with the right corporate attorney for your needs.


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