LLC - Limited Liability Company FAQs

What is a Limited Liability Company or LLC?

A Limited Liability Company is an corporate entity created under and governed by the laws of the state in which it was formed. Limited liability companies provide liability protection as well as the pass-through taxation benefits of partnerships or S corporations. Each jurisdiction has its own distinct set of laws governing LLCs.

Is the formation of an LLC different than a standard corporation?

Yes. An LLC file Articles of Organization with the state rather than Articles of Incorporation. Additionally LLCs generally utilize an operating or management agreement to set forth the details on how the organization is to be managed, rather than bylaws. Each state publishes the fee structure for LLC formation on the web site of the Secretary of State of each state.

What are the advantages of an LLC?

The most important advantages of an LLC are:

• Flexible Management Structure and Income Distribution: An LLC allows the most flexible management agreements, and the most freedom to distribute income in any manner that the members agree upon without the need of additional filings.
• Limited Liability: An LLC provides the same amount of liability coverage as that of a traditional corporation. In general, a member is only liable for the amount invested in the LLC. Articles of Organization form and the LLC fee structure form.
• Pass Through Taxation: Like a partnership or an S corporation the LLC allows for pass-through taxation, which means that the income from the LLC is only taxed at the individual level as opposed to both the individual level and the corporate level as in traditional C corporations.

What are the disadvantages of an LLC?

There are few true disadvantages to the LLC entity, however the most common cited are:

• More Paperwork than a partnership or a corporation: An LLC allows the most flexible management agreements, and the most freedom to distribute income in any manner that the members agree upon without the need of additional filings.
• Dissolution Date: In some states an LLC can only exist for a set number of years; however, this seems to be changing as more and more states allow for unlimited duration LLCs.
• Fund Raising: An LLC does not have the same abilities to raise capital through the equity markets that a C corporation would enjoy.

How is an LLC managed?

An LLC can be managed by two distinct methods. The first is management by the members themselves, which is very similar to the management of a traditional partnership. The second method is for the members to officially designate managers to control the operations of the LLC, much like a traditional C corporation. It is important to note that the default method if almost every state is member management, if you want to have managers run the LLC remember to fill out the appropriate areas of the registration form.

What is a Management or Operating Agreement?

The Management or Operating Agreement is a document agreed upon and signed by the members that lays out the basic operating structure of the LLC. For simple LLCs there are plenty of forms available on the internet for a minimal amount that will form a basis for a management agreement. For more complicated entities or situations where conflict is likely to arise, consulting a lawyer regarding the operating agreement is a good idea.

How do I create an LLC in my state?

Each state has individual rules for the creation of an LLC. However, the following steps will generally enable you to register your LLC:

• Step 1 - Visit the State Controllers Web Site: The Secretary of State of each state has a web site where users can download the various forms necessary to create an LLC. The key downloads that should be obtained are the Articles of Organization form and the LLC fee structure form.
• Step 2 - Decide on a Name: Most states require a new LLC to contain the words LLC or Limited Liability Company in there title. Additionally, the name of a new LLC must not match a currently registered LLC for obvious reasons. Articles of Organization form and the LLC fee structure form.
• Step 3 - Fill in the Articles of Organization: The articles form is generally a one page form that requires the the names and addresses of the members, the names and addresses of the managers (if applicable), and the physical, in state, address of the registered agent, which can be one of the members.
• Step 4 - Figure out the required fees: The fee structure form should clearly state the fees required to register a new LLC in the state that you choose.
• Step 5 - Mail in the form and the payment: Once the form and the payment are complete mail the packet into the address listed on the Secretary of State's web site and wait for the results. Generally, you can select either standard turn around time, or for a fee an expedited service.
• Step 6 - Things to Remember: 1) Some states require the payment of a franchise tax upon the creation of an LLC. 2) Don't forget to obtain an employer identification number from the federal government. 3) Every member should have a signed copy of the management agreement to avoid any future misunderstandings.

Which states offer the most beneficial status to LLCs?

As of early 2005 Nevada and Delaware offer the best financial package for LLC creation, however, if you do not live in either of these states, the fee for the registered agent can change the financial equation. Always consult the fee structure of your own state before jumping to the conclusion that Nevada or Delaware are the place you should incorporate. Why are small companies hesitant to create an LLC in California? Unfortunately California has an $800 per year minimum franchise tax for LLCs, which effectively eliminates them as an option for companies with minimal income. As such, many small companies choose to incorporate as S corporations instead.

What are the tax implications of an LLC?

One of the benefits of an LLC is that in most cases it allows pass-through tax treatment which allows the income or loss generated by the business to be reflected on the personal income tax return of the owners. This special tax status eliminates any possibility of double taxation.

What is a Registered Agent?

A registered agent is the LLC's designated person/entity of record that resides in the jurisdiction of the incorporation. States require a registered agent in order to have a local contact for tax and legal purposes. Many companies offer services as registered agents.

Where can I get more information on state by state LLC rules and regulations?

• Idaho LLC FAQs - Frequently Asked Questions about creating an LLC in the State of Idaho.