LLCs have become a popular business structure for startup companies, with numerous types of businesses such as brick and mortar stores, restaurants, online companies, and real estate investing choosing to operate as LLCs. This article aims to address the most frequently asked questions regarding the formation and operation of LLCs.
Firstly, LLC stands for Limited Liability Company; it is a widely used company structure that provides owners with limited liability protection similar to corporations. This means that owners of the LLC may not be held personally liable for the debts and obligations of the company, as long as it’s properly operated. This liability protection is not available in sole proprietorships or general partnerships. LLCs, alongside S corporations and C corporations, are popular business structures.
Secondly, LLCs can provide “pass-through” tax treatment, where there is only one level of tax, which can avoid double taxation. This means only the owners of the LLC are taxed, and there is no tax at the LLC level, similar to S corporations.
Thirdly, when choosing which state to organize an LLC in, it’s common to choose Delaware because of its established state law. However, organizing the LLC in your home state is recommended in most situations to save on fees, filing obligations, and complexities.
When forming an LLC, the easiest way to do so is by using an online business formation service for simple LLCs, while a lawyer well-informed of LLCs may be suitable for more complicated LLCs.
Expenses to consider when forming an LLC include state filing fees, fees to form the LLC with service providers ($100-$500), minimum annual franchise tax ($100-$800), registered agent fees ($100-$400), state report fees ($20-$100), business license fees ($50-$100), and tax and accounting fees from your hired accountant.
To form an LLC, essential documents include Articles of Organization (similar to Articles of Incorporation for corporations), LLC Operating Agreement, business license application, an Employee Identification Number, DBA name form (if necessary), and bank account forms.
In choosing an LLC name, it should end with “LLC,” “Limited Liability Company,” or an abbreviation thereof, be distinct from all active foreign and domestic companies, cannot contain certain terms forbidden by state law or words such as “corporation,” and a trademark search should be conducted.
LLCs are typically managed by one managing member, a group of members, an outside manager, or all members. Key issues to address in an LLC Operating Agreement include capital contributions, profit, and loss distribution, management of the LLC, and voting rights, among others.
The principal disadvantage of an LLC is limited access to professional investors such as venture capitalists who prefer investing in C corporations. Additionally, transfers of ownership interests are more complicated, and some states may impose additional requirements.