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Is an LLC the right entity for your business?

Learning how to form an LLC is quite an easy task with the proper guidance. A limited liability company, or LLC, combines the benefits of sole proprietorship and partnerships. Additionally, there are great tax benefits.

LLCs also offer limited liability protection that is often superior to protections for corporations because it is more difficult to “pierce the corporate veil” and attach personal property to an LLC. An LLC is not considered to be a corporation. Instead, it is considered to be an unincorporated business entity.

In order for you to learn how to form an LLC, you typically must follow a uniform process. Usually, forming an LLC requires a state filing in the Secretary of State’s Office. That being said, many states allow you to complete the process online. Individuals can form LLCs and the number of members permitted varies due to local state laws. What is required for the state filing consists of the following information:

Members

All LLCs are required to have at least one member. LLC members are typically owners of the LLC just like shareholders are the owners of a corporation or the partners of a partnership. Similar to shareholders, a member’s liability to repay the LLC’s obligations is limited to his or her capital contribution.

Members may be natural persons, corporations, partnerships, or other LLCs.

Membership Interest

A member’s ownership in the LLC is called the “membership interest.” Membership interests are typically divided into standardized units, which are often called shares. Unless otherwise mentioned in the operating agreement, a member’s right to control to manage the LLC is proportionate to their membership interest.

Manager

LLCs are normally managed by their members in proportion to their membership interest. That being said, many operating agreements provide for a manager or board of managers to run the day-to-day operations of the LLC. The managers are elected or appointed by members and may also be removed by members. A member may be a manager or managing member, which is similar to the managing partner of a partnership.

Articles of Organization

All LLCs must file evidence of their existence with the Secretary of State of the state where they choose to be incorporated. The Articles of Organization serve this purpose and are the LLC version of a corporation’s Articles of Organization serve this purpose and are the LLC version of a corporation’s Articles of Incorporation.

All LLCs must disclose their company name, appoint a statutory agent, and disclose their purpose of business. Additionally, the fees of filing the Articles of Organization also vary by state.

Operating Agreement

The Operating Agreement of an LLC is the most important document because it determines, defines, and allocates the rights of the members. Operating Agreements must be drafted carefully in order to avoid common disputes that transpire between members.

LLC Benefits

Taxation

If an LLC decides to be taxed as an S corporation, the LLC can bypass double taxation by reporting its entire income on the personal income tax returns of its members. This calculation is conducted based on the varying percentage of interest that the owners have in the business. The Operating Agreement will dictate how this is apportioned. That being said, choosing to be taxed as an S corporation evades double taxation, it also means that company losses can be reported on the shareholders’ personal income tax return, which reduces tax liability.

Asset Protection

LLCs provide limited liability protection to their members. Members are normally not personally responsible for the business debts and liabilities of the LLC. Creditors can’t go after your personal assets of members to pay business debts.

Flexibility

LLCs have a flexible management structure. LLCs can be managed by the members or by managers, unlike corporations which have a board of directors who control major business decisions.

Credibility

Forming an LLC might help your business gain credibility, especially early on. An LLC shows customers, employees and vendors that you have made a formal commitment to your business.

Compliance

LLCs face less state imposed annual requirements than S and C corporations.

LLC Disadvantages

Cost

An LLC costs more to establish than a sole proprietorship. Many states also impose ongoing fees.

Exit

Selling a corporation is simpler than selling an LLC.

Experience

LLCs are newer entities than corporations. You will find fewer qualified professionals to help you with your LLC.

It is always best to seek the professional advice of an attorney and a CPA to determine which is the best entity for your business.

photo credit: Startup Live Lisbon

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George Meszaros is the editor and co-founder of Success Harbor where entrepreneurs learn about building successful companies. Success Harbor is dedicated to document the entrepreneurial journey through interviews, original research, and unique content. George Meszaros is also co-founder of Webene, a web design and digital marketing agency.