An LLC combines the liability protection of a corporation with the tax flexibility and simplicity of a partnership.
Simplicity
Next to operating a business as a Sole Proprietor or Partnership, Limited Liability Companies are the least complex and costly form of business to start and maintain from a state compliance perspective. The business registration paperwork to register an LLC is minimal as are the ongoing filing requirements.
Personal Liability Protection
Because an LLC is considered a separate legal entity from its members, its financial and legal responsibilities are also its own. So, if someone sues the business or the company cannot pay its debts, the LLC members are typically not held responsible. Therefore, their personal assets are at a lower risk of being seized to pay legal damages or settle debt than they would be if the business were a Sole Proprietorship or Partnership.
Tax Treatment Options
By default, a Limited Liability Company is considered a “disregarded entity” for tax purposes. As such, income tax is applied in the same way as it is to Sole Proprietorships and Partnerships. Business income and losses are passed through to its members’ tax returns and are subject to members’ individual tax rates. An LLC has other tax treatment options, too. Members can opt for an LLC to be taxed as a corporation, with profits taxed at its corporate rate. Or members of an LLC can choose S Corporation election, which allows for the LLC to have pass-through taxation but with the corporate benefit of a reduced self-employment tax burden because members only pay Social Security and Medicare taxes on their income taken as salaries; members’ dividend income is not subject to self-employment taxes.
Management Flexibility
An LLC may be either member-managed or manager-managed. In a member-managed LLC, the owners handle the day-to-day management of the business. In a manager-managed LLC, members appoint one or more managers to manage the company. In most states, an LLC can appoint members of the LLC to be managers, or it can hire someone else to do the job. The managers of an LLC usually have the authority to make certain decisions and run the day-to-day operations of the company while members retain authority over more significant strategic matters. Most states consider an LLC to be member-managed unless the formation paperwork indicates it should be manager-managed.
There are multiple types of Limited Liability Companies available. Before you set up your Limited Liability Company, it is best to consider your needs and then compare these requirements to the available LLC options. Below is a list of available LLC options, however, not all states recognize all types of LLCs, so entrepreneurs must review their state’s options.
Your questions about LLCs answered
Yes, all states allow single-member LLCs. There is also a multiple-member LLC.
An LLC organizer is the person (18 years of age or older) or entity that prepares, signs, and files an LLC’s Articles of Organization with the state.
An LLC member is a person or entity who is the owner of some or all of an LLC. Unless the LLC’s Articles of Organization specify managers will control the company, the members make all business decisions.
An LLC may be operated by a manager or group of managers who act much like a corporation’s board of directors. LLCs must outline in their Articles of Organization whether the LLC will be member-managed or manager-managed.
No. LLCs are not permitted to issue stock in any state. Only corporations may issue stock.
An LLC may have one or more members. Members are the owners of the LLC, similar to stockholders in a corporation. Members typically receive an ownership stake in the LLC commensurate with their investment (either financial investment or sweat equity).
A member’s ownership of an LLC is represented by “interests,” Just as a partner has an interest in a partnership and shareholders own stock in a corporation.
Most multi-member LLCs choose the member-managed LLC option. In a member-managed LLC, all members participate in the decision-making process and the work of the company. Significant decisions, such as entering contracts and securing loans, must have approval by most of an LLC’s members.
Most states consider an LLC to be member-managed unless specified on the company’s Articles of Organization. While states don’t require one, a member-managed LLC should have an Operating Agreement explaining each member’s responsibilities in running the company, decision-making authority, and how profits should be distributed among members.
The member-managed management structure may be preferable if:
Some possible downsides of a member-managed LLC include:
As a “disregarded entity” for tax purposes, an LLC’s profits and losses flow through to its members’ personal tax returns. From a legal standpoint, an LLC is considered a separate entity from its members, so it provides some liability protection to its owners. Generally, LLC members’ personal assets are not at risk if the company gets sued or cannot pay its debts.
LLC members may choose how their business will divide the company’s profits and losses among its owners. This allows members to consider not only money invested but also time and work contributions when distributing profits.
LLC members may elect to have their LLC treated as a C Corporation or S Corporation (if they meet the qualification requirements).
All of an LLC’s business profits are subject to Social Security and Medicare taxes. This may create an unfavorable financial situation for LLC owners. They must pay self-employment taxes on their distributive share of the LLC’s profits, even if they invest that money back into the business.
Both the LLC and S Corporation structures are taxed on a pass-through basis. Income taxes are paid at the individual owner level rather than at the entity level. Profits and losses get reported on the owners’ personal tax returns.
However, although LLCs and S Corporations are both pass-through entities, there are some differences in how taxes are handled.
The organizational meeting is held after an LLC has filed its formation documents. At the organizational meeting, many initial tasks are completed, such as:
Other business matters may also be discussed and decided upon at the organization meeting.
An LLC Operating Agreement is an official contract that spells out the management and ownership of the company. It may outline details like:
States do not require business owners to create an operating agreement to form an LLC. However, many states require an LLC to keep an operating agreement at its principal place of business to maintain corporate compliance. Even in states that do not require a formal operating agreement, it can be beneficial to maintain one. An LLC Operating Agreement helps avoid misunderstandings by clarifying the roles and responsibilities of the LLC’s members.
States do not require LLCs to hold annual meetings. This is one of the benefits of the LLC; it has fewer formalities than a corporation. However, if an LLC’s Operating Agreement requires an annual meeting (or other meetings), it must hold such meetings to stay compliant. Many owners choose to make meetings optional in the Operating Agreement.
LLCs must designate a registered agent in the state(s) where the company is registered. A registered agent (sometimes referred to as a resident agent) is a person or company officially recognized by the state that resides within the state of incorporation. It is designated by the LLC to accept service of process on behalf of the company. A registered agent may be an individual or another business entity with a physical location in the state of incorporation.
Please note that a post office box or other mail service (e.g., UPS) is usually not sufficient to qualify as a registered agent. The agent is responsible for accepting official notices from the Secretary of State and service of process in the event the corporation is sued.
An LLC’s registered agent must be available Monday through Friday from 8 am to 5 pm at the location specified on the LLC’s Articles of Organization. The registered agent’s name and address are public information, therefore giving some privacy protection to an LLC’s owners.
If an LLC is foreign qualified to do business in other states, those states will generally require an LLC to have a registered agent there. For example, if a California LLC has filed the necessary paperwork in Nevada to conduct business in the State of Nevada, the state of Nevada will require a Nevada registered agent. This may be an individual or another business entity that has a physical location in the state of Nevada.
In certain states, new Limited Liability Companies must file an Initial Report, also known as an initial Statement of Information with the secretary of state’s office. Usually, the Initial Report is due shortly after the LLC is formed with the state. Schedules for each state vary. Failure to provide the required information on time may result in such penalties and late fees by the state. An LLC may also be subject to suspension or dissolution if it does not meet the Initial Report deadline.
Information requested in an Initial Report may include:
Currently, new LLCs must file an Initial Report in the following states:
Anyone can file the Initial Report on behalf of the LLC. However, in most cases, the state will require at least one LLC member’s signature.
The Annual Report (sometimes called “Statement of Information”) is a state requirement for LLCs in most states; all states, except Alabama and Ohio require an Annual Report filing. States request Annual Reports so that they can keep up to date with LLCs’ vital information. The requirements for this filing vary from one state to the next. On our website, we provide specifics for each state.
Typically, LLC Annual Reports ask for information about the company’s:
LLCs must file their Annual Reports by the state’s due date. Scheduled filings vary by state. Usually, Annual Reports are due once a year on or around the anniversary date of the LLC. Some states require them every other year or on some other schedule (for example, Pennsylvania LLCs must file an Annual Report every ten years).
Related Reading: Annual Report List by State for LLCs and Corporations
Failure to submit the filing with the requested information by the requested deadline may result in the state’s assessment of penalties and late fees. In addition, states may also suspend or administratively dissolve an LLC if it doesn’t file its Annual Report.
You often hear of entrepreneurs registering their businesses in Delaware, Wyoming, or Nevada even if they don’t have a physical presence there. That’s because Delaware offers flexible, pro-business statutes. Wyoming and Nevada are attractive because they feature low filing fees and no state corporate income, franchise, or personal income taxes.
The general rule of thumb is that if an LLC has fewer than five members, it’s probably best to register in the state where members live or where the business has a physical presence (such as an office). Registering in a state that’s different from where the LLC has a physical presence brings additional fees and paperwork. For most small businesses, the added hassle and costs aren’t worth the potential advantages that come from being registered out of state.
Often, it’s best to file an LLC as soon as possible after starting a business. After all, the main benefit is liability protection. By waiting, business owners expose themselves to liability.
An LLC’s start date is not retroactive. As a result, owners will probably need to file two sets of income tax returns for the business if it changes to an LLC mid-year. For example, if an LLC were formed on June 1, its owner(s) would need to file taxes as a sole proprietor or partnership from Jan. 1 through May 31 and then file taxes as an LLC from June 1 through Dec. 31.
No. There are no retroactive LLC advantages when forming an LLC. Any action under the LLC is only valid from the date the LLC comes into existence.
A Limited Liability Company must also pay attention to the ongoing compliance requirements it must fulfill to remain a legal entity in good standing with the state. Compliance obligations vary from one state to the next.
Some common examples of what many LLCs need to pay attention to include:
Once you have decided to create an LLC, you must choose the state in which you will be incorporating or registering the LLC. Generally, if you have a small business and are going to be conducting a substantial amount of your business in your home state, the general norm is to incorporate it within your home state.
Most people choose Delaware, Nevada, or their home state. Delaware is often chosen, especially by larger companies, because it has the most developed and flexible corporate statutes in the country and is considered pro-business. Nevada has also become popular because of its lack of state corporate income tax, franchise tax, and personal income tax. It also has relatively low fees.
Nevertheless, if you have a small business and are going to be conducting a substantial amount of your business in your home state, it will likely be beneficial to incorporate it in that state. If you register your LLC out-of-state, but do much of your business in your home state, you may have to make a filing to “qualify to do business” in the state if there is a substantial ongoing business or physical presence in the state. You may then be subject to the same fees, taxes, and regulations as if you had incorporated there in the first place, and you will have paid filing fees (and, perhaps franchise taxes) to more than one state.
