Questions About Forming an LLC
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What is a Limited Liability Company?
The LLC is not a partnership or a corporation. It is a distinct business entity that offers an alternative to partnerships and corporations by combining the corporate advantages of limited liability with the partnership advantage of pass-through taxation.
What paperwork is required to form an LLC?
Articles of organization must be prepared and filed with the state and filing fees, initial franchise taxes, and other initial fees must be paid.
If your LLC is formed through Business Filings Incorporated, all you need to do is complete our simple order form. We will prepare and file your articles of organization and pay the initial filing fees.
Do I need an attorney to form an LLC?
No, an attorney is not a legal requirement. You can prepare and file the articles of organization yourself; however, you need to be thoroughly versed in the laws of your state.
You can use our service to form your LLC and save money on attorney's fees. However, if you are unsure of what entity would be most beneficial to your business, consult an attorney or accountant.
Choose the name of your LLC carefully. It is very important that your name portray the image you want for your new company. Legally, the name you select must not be deceptively similar to any existing LLC in your state.
For example, if an LLC named West LLC exists in your state, you probably would not be allowed to name your business West Limited Liability Company. It is possible that the name you select will not be distinguishable; therefore, we ask for a second choice on the LLC order form.
The name you select must show your business is a Limited Liability Company, so it must include the words "Limited Liability Company," or the abbreviation LLC.
How many people are needed to form an LLC?
Currently one state requires two members. This state is Massachusetts. All other states allow one or more members.
The IRS does allow one member LLCs to qualify for pass-through tax treatment; however, taxation of one person LLCs at the state level may be different.
One owner LLCs are treated the same as sole proprietorships. Profits are reported on Schedule C as part of your individual 1040 tax return. Self-employment taxes on LLC net income must be paid just as you would with any self-employment business.
Multiple owner LLCs are treated as a partnership by the IRS. The tax return that the LLC completes and files is IRS Form 1065, Partnership Information Return. On this form, LLC profits are reported and allocated to each of the owners according to the LLC's operating agreement. Each owner is given a Schedule K-1, which shows each owner's share of LLC income or loss. The owner then reports and pays taxes on this income on the owner's annual 1040 income tax return.
Please note that as with a sole proprietorship, all profits of the LLC are taxed to the owners, even if they are not actually distributed by the LLC. This situation could happen when the LLC needs to use its profits to meet ongoing expenses.
There is a possible third tax treatment that an LLC could elect if it did not want pass-through taxation. The LLC may elect to be taxed as a corporation by completing IRS Form 8832 and checking the corporate income tax treatment box. After making this election, the LLC is taxed as a C corporation by the federal government. Because the corporate income tax rates for the first $75,000 of corporate taxable income are lower than the individual income tax rates that apply to the taxable income of non-corporate taxpayers, it is possible a net income tax savings can result from this tax election.
The state income tax treatment of LLC profits typically mirrors the IRS tax treatment as discussed above. Some states have different rules. For specific information on your state rules visit your state's web site. The web address can be found on our detailed state information page.
Please note that California LLCs are subject to an annual minimum franchise tax of $800 per year. The first payment must be made within 3 months of forming your LLC. The state of California does send a bill to help you make this payment.
What is the organizational structure of an LLC?
An LLC is owned by its members. They are analogous to partners in a partnership or shareholders in a corporation, depending on how the LLC is managed. A member will more closely resemble shareholders if the LLC utilizes a manager or managers, because then the members will not participate in management. If the LLC does not utilize managers, then the members will closely resemble partners because they will have a direct say in the decision making of the company.
A member's ownership of an LLC is represented by their "interests," just as partners have "interest" in a partnership and shareholders have stock in a corporation.
An LLC may be managed by its members (owners) or by selected managers.
If the LLC is to be managed by its members, it operates much like a partnership. Each member has an equal say in the decision making process of the company.
If the members choose, they may elect a manager or managers to act in a capacity similar to a corporation's board of directors. These managers are in charge of the affairs of the corporation.
Member management is the normal default rule of state law. This means that if managers are not selected in the articles of organization, the members will direct the affairs of the LLC.
What are the advantages of an LLC?
LLCs offer numerous advantages.
- Pass-Through Taxation
LLCs allow for pass-through taxation. This means that earnings of an LLC are taxed only once. The earnings of an LLC are treated like the earnings from a partnership, sole proprietorships and most S corporations. - Limited Liability
The LLC owner's liability is generally limited to the amount of money which the person has invested in the LLC. Thus, LLC members are offered the same limited liability protection as a corporation's shareholders. - Flexible Management
Structure and Flexible Ownership is Permitted
Like general partnerships, LLCs are generally free to establish any organizational structure agreed on by the members. Thus, profit interests may be separated from voting interests.
What are the disadvantages of an LLC?
The disadvantages of an LLC include:
- More Paperwork Than
an Ordinary Partnership
Documents must be filed at the state level to create an LLC, which is not the case with a general partnership. - Dissolution Date
Some states require that a dissolution date be listed in the articles of organization. This date may be amended. Further, certain events, such as death of a member, a member leaving, bankruptcy, etc. can be a dissolution event. A corporation has unlimited life and these events are not dissolution events for a corporation. - Newer Entity Type
The LLC is a newer entity, and people are not as familiar with the LLC as a corporation.
Should I choose an LLC or an S corporation?
While the S corporation's special tax status eliminates double taxation, it lacks the flexibility of an LLC in allocating income to the owners.
An LLC may offer several classes of membership interests while an S corporation may only have one class of stock.
Any number of individuals or entities may own interests in an LLC. However, ownership interest in an S corporation is limited to no more than 75 shareholders. Also, S corporations cannot be owned by C corporations, other S corporations, many trusts, LLCs, partnerships, or nonresident aliens.
LLCs are allowed to have subsidiaries without restriction. S corporations are not allowed to own eighty percent or more of another corporation's shares.
What is a publication requirement?
A few states require notice to be published in a newspaper that a corporation or LLC has been formed. States with this requirement include: Pennsylvania (corps only), Georgia (corps only), Arizona (corps and LLCs), Nebraska (corps and LLCs), and New York (LLCs only). The filing performed by Business Filings completes the publication requirement for each of the states except for New York LLCs.
In New York, all LLCs formed or foreign qualified there are required to publish a notice of formation for six consecutive weeks in assigned newspapers. This requirement does not affect the good standing status of the LLC; however, an LLC is required to complete this requirement in order to have access to the New York State court system.
The publication is made at the county level in two newspapers as assigned by the local county recorder. The cost of this requirement varies greatly based upon the county where the business is located. In New York County, the publication costs will be higher than in the rest of the state.
The reason Business Filings does not perform the publication requirement in New York is because of the great difference in price from county to county. To comply with this requirement, please contact your local county recorder’s office and they will assign the newspapers. The county recorder’s phone number is located in the blue pages of your local phone book.
A court in New York declared the publication requirement to be unconstitutional in November of 2001; however, this case is currently under appeal. Until a decision is made in the appeal, the New York LLC publication requirement remains in effect.
After you decide to form an LLC, articles of organization must be filed with the state government and initial fees must be paid. If you choose Business Filings to form your LLC, we will complete these administrative tasks legally and affordably.
After your articles are filed, your LLC should have an organizational meeting where an operating agreement is adopted, interest certificates are distributed, and other preliminary matters are completed.
Business Filings' LLC kit includes all of the information and paperwork to make this process easier.
