Limited Liability Companies (LLCs) are the foundation of millions of start-up businesses. LLCs are the best choice for restaurants, real estate companies, eCommerce companies, and retail stores.
Here are ten questions I answered about the formation and operation of an LLC.
1.What is an LLC?
An LLC is a standard business structure. S corporations, LLCs, and C corporations are some of the most popular business structures. LLCs provides limited liability protection for their owners, much like a corporation. If it is appropriately managed, the LLC’s owner should not be personally liable to the business for its debts and obligations.
2.What are the tax benefits for LLCs?
An LLC can offer “pass-through tax treatment,” so there is only one level of tax. It can also avoid double taxation like C corporations. Only LLC owners are taxed unless an alternative tax election is made. The LLC level is not subject to any tax. This is very similar to S corporation tax treatment.
3.Which state should you establish your LLC in?
This means that you will need to decide which state you would like to organize. Delaware was a popular choice due to its strong state law. However, you will need to set up LLC in your state to save fees, filing obligations, and complexity in most situations.
4.How do you form an LLC the easiest way possible?
An online service that facilitates the formation of LLCs is the best option for simple LLCs, such as those with only one owner. An experienced lawyer in LLCs might be more suitable for more complex LLCs, such as those with multiple owners or complicated management/voting/ownership rights.
5.What is the cost of forming an LLC
These are some of the most common costs associated with forming and operating an LLC.
- State filing feesThe price ranges between $35 and $500 depending on the state.
- For the formation of your LLC, there is a fee for you can form an LLC on many websites. There are many options. Most typically, the costs range from $100 to-500. The prices for using an attorney will be higher depending on how complex the matter is.
- Annual franchise tax–The state will likely impose a yearly minimum franchise tax, usually $100 to $800 per calendar year.
- Register agent fee LLC must have a “registered agents for service of process” in every state in which it is registered. This person or company agrees that they will accept legal documents on behalf of the LLC if it is issued. A registered agent can be an employee, owner, or attorney. However, many LLCs prefer to have a professional registered agent company. The annual fee for this service is usually $100-400.
- State report feeA lot of states require that LLCs file reports (every year, every two years) with Secretary of State to keep the LLC’s information current. This is also known as an “Annual Report” or “Statement of Information.” It usually costs between $20 and $100.
- License fees for businesses in your state, county, or city might require you to get a business license depending on where is your business located. Typically, the cost of ownership ranges from $50 to $100.
- Tax/accounting fee–An LLC will usually hire an accountant to prepare its annual tax filings. They will also produce the IRS K-1 statements, which must be presented to the LLC’s owners each year.
- 6.What are the most important documents needed to form an LLC?
Here are the essential LLC forms and documents
- Articles of OrganizationThis is the document filed with the Secretary of State to form an LLC. Sometimes, it’s called a Certificate of Organization by the state.
- LLC Operating AgreementThis is an agreement between the LLC’s owners that defines the financial, capital, voting rights, and other responsibilities. A standard form of LLC Operating Agreement is available from most lawyers and online services. It can be modified to fit unique situation.
- Application for a business license you may need to apply for a business license in your state, town, or county.
- Employee Identification NumberThe IRS requires you to obtain an Employee Identification Number (EIN), which you can apply online. This service is free of charge.
- DBA–If your LLC is operated under a different name than the business name on file with the state, you might need to file a DBA (“doing business as”) form.
- Bank account forms -Your LLC should have its own bank/checking account to keep the company’s money separate from the personal funds of its owners. Banks require that you complete certain forms before opening an account. You will also need a copy of your LLC’s Articles of Organization.
- 7.What can I call my LLC?
There are several issues to consider when naming an LLC.
- The name should usually include “LLC,” “Limited Liability Company,” etc.
- The name must be distinct from all foreign and domestic LLCs currently filed with the Secretary of State. In California, you can search the records for LLC names at sos.ca.gov.
- Some terms, such as “bank,” trustee, or insurance company, are not allowed in the name.
- Names cannot contain the words “corporation,” inc., “incorporated,” or “corp.” (to avoid misinterpretation of the LLC as a corporation).
- To ensure you’re not violating another party’s trademark, you need to perform a trademark search (check out uspto.gov).
- It is good to conduct an extensive internet search about the proposed name to determine if any other companies may be using it.
- Avoid choosing a name that is too restrictive as you grow your business (e.g., “Oakland Tires, LLC”)
- You should check if you can get the “.com” domain name associated with your business (as opposed to “.org,” “.net,” or another variant).
- 8.How can LLCs be managed and owned?
Owners of LLC are called members, as said to shareholders or stockholders of a corporation. A single-owner LLC has one member who owns 100% of the LLC’s interests.
A majority of LLC owners have the right to vote and a share in the LLC’s losses and profits. All of this is set out in the LLC’s Operating Agreement.
As you can see in the Operating Agreement, the LLC can be managed by either one or more members.
An LLC doesn’t have a Board, as is the case for corporations.
9.What’s typically included in an LLC Operating Agreement
The LLC Operating Agreement defines the owners’ financial and management rights, as well as other responsibilities. The following are key issues that the LLC Operating Agreement should address.
- The members’ capital contributions to the LLC. When these contributions are required.
- There may be sanctions or remedies for failure to make capital contributions.
- How profits and losses are divided and cash distributed among owners.
- How the LLC will determine if any of its members or classes of securities preference distributions or liquidation (similar to “preferred stocks” in a corporation).
- Who will manage and run the LLC?
- How many officers will you be able to appoint?
- Voting rights to significant events such as the addition of capital or sale of businesses.
- Management of the business is protected by indemnification.
- Restrictions on the transfer of LLC interests (often referred to by “units”).
- Procedures for members’ meetings
- Procedures for dissolution.
- 10.What are the major disadvantages of an LLC?
There are some disadvantages to this:
- Venture capitalists or other professional investors are unlikely to invest in LLCs. They prefer to invest in a C-corporation.
- Transferring ownership interests can be more complex than stock transfer in a company.
- Some states will impose an annual minimum franchise tax. There may also be a tax on gross income above $250,000.
- A multi-member LLC Operating Agreement should be carefully drafted.
- For each IRS K-1 form issued annually, additional accounting fees may be required.
- On the LLC’s profits, the LLC owners may be subject to self-employment taxes.
- Pass-through taxation means that if an LLC makes a profit, it will need to report its portion of the income as income on its tax returns.
- It is easier to issue equity and employee options in LLCs than it is in corporations.