7 Things You Should Know About an LLC

by Frank

The LLC is a popular business structure exclusive to the United States. It essentially combines liability protections formerly exclusive to corporations with income distribution models traditionally seen in partnerships and sole proprietorships. Organizing an LLC is simple and can be done in a few minutes on the website of most Secretaries of State. There are limitations to the LLC organizational structure and when faced with growth, conversion to a traditional corporation may be preferred. For most small businesses and entrepreneurial adventures, the LLC is an ideal business strategy.

Typically, filing fees are modest and the insulating liability aspects provide security to families and unsecured creditors of individuals starting their own businesses. It also allows bookkeeping advantages in maintaining financial integrity of startup enterprises. Often, LLCs mimic a partnership in all practical purposes when there are multiple participants in the enterprise. If, however, it is a single member LLC, it essentially functions as a sole proprietorship afforded the liability protections of a more traditional corporate structure.

Forming an LLC

The process of forming an LLC involves the filing of a specific form with the corporate regulatory authority in the state in which one seeks to register the LLC. The state of choice should be the state in which the LLC is doing business. For a real estate investment LLC, the proper venue is almost always the state in which the property is located. The paperwork involved is typically quite simple and can be filled out in just a few minutes. There is a registration fee involved that varies from state to state. While it is prudent to consult an attorney in setting up the LLC, it is not mandatory.

In choosing the name of an LLC, it must be unique and it must be legal. If the name is in use by another entity, it is not unique. Certain words, such as “bank” or “insurance” are typically not allowed in the name of an LLC. Some states require that a name not be misleading. Consulting either a qualified small business attorney and/or the website of the state regulatory body, typically the Secretary of State, should provide guidance on naming of an LLC. Most forms of LLC do not require the entity to pay corporate taxes. The income derived from the LLC passes through the entity to its members, who then must declare the derived income on their personal taxes.

The individual may be required to pay self-employment taxes on pass through LLC income. In a traditional corporate business structure, self-employment taxes would not be paid, but corporate taxes would be paid before profits pass to shareholders, and thereby taxing the same dollars twice. Single member LLCs are treated by the Internal Revenue Service as sole proprietorships for taxation purposes. Multi-member LLCs must file a partnership income form with the IRS, but it serves as a guideline for the distribution of profits and losses amongst the members in accordance with the organizational structure of the LLC.

Operating Agreement

A general statement is sufficient and a high level of specificity is neither required nor typically recommended. Consulting a qualified business lawyer is recommended if there are questions regarding specific filing criteria. The primary benefit of an LLC is protection from liability. In a partnership or sole proprietorship, the personal assets of the business participants are potentially at risk should the business fail to meet obligations to creditors or become involved in litigation damaging to the business. The LLC structure mimic corporations in that the participants generally receive liability insulating benefits that protect personal assets from potential creditors so long as the integrity of the structure is protected by timely compliance with all regulatory reporting procedures.

Protection from liability is the guiding principle for the existence of the LLC as a business entity. An LLC can be the functional equivalent of a partnership with regard to the distribution of business income. Profits generated by an LLC pass through the entity untaxed and are then distributed to the participants and taxed individually rather than as corporate profits. Multi-member LLCs pass through all profits and losses to their members, who then declare them on their personal taxes. The LLC must file a form with the IRS which sets out the distribution of profits and losses amongst all members, but the entity itself does not pay taxes. If you need legal assistance you can also find additional legal aid here and you can search for a lawyer here.