Basics of LLC Incorporation

2007-03-08 10:33:40

( Business )



What is a Limited Liability Company?

A limited liability company or LLC is a cross between a partnership and a corporation, and combines the best features of each. Like a partnership, its owners (known as members) are taxed only for the profits they make in the LLC. Like a corporation, the LLC is a legal separate entity from the individual person, so the members are not personally liable for the LLC's debt obligations even if it becomes bankrupt.

A LLC has no ownership restrictions in terms of number or legal status, thus it is easier to raise capital. The LLC also uses the cash method of accounting compared to the accrual method used by corporations.

The only major disadvantage is that LLC incorporation needs more paperwork and incurs more costs. Records of all members must also be kept separate. In some cases, the members of a LLC may possibly pay more taxes because their profits are subject to both social security and medicare taxes.

Setting up a LLC

You can incorporate a LLC in any state, but it is better to choose a state where you will be doing business in. Also consider that some states such as Nevada do not tax out-of-state incomes. You need to submit articles of organization to the Secretary of State, as well as an operating agreement which describes company rules and member rights. You also need to obtain a tax identification number from the IRS.

LLC incorporation requires you to choose a name which is unique, and the business name must end with "LLC", "Limited Liability Company", or any of its abbreviations. If you're manufacturing or selling a branded product, it is also advisable to obtain a federal trademark protection in order to maintain your exclusivity.

Though not required by LLC incorporation rules, you can choose your officers and managers. The latter need not be a member of your LLC. You also need to choose your registered agent, who is preferably a neutral entity (such as a legal firm) to act on your company's behalf in case of lawsuits or special situations. Some states require you to submit a list of members.

You need to pay the LLC annual fee which varies from state to state. Income tax requirements are also different by state.

Capital ownership can be either by percentage of ownership or by membership units similar to corporate stocks. These units give members the rights of voting and sharing in the LLC's profits. You can also adopt different ownership "classes" similar to common or preferred stocks of corporations. Transfer of ownership is easy, but it is preferably with consent of other members.


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