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Limited Liability Company (LLC)

Forming a Limited Liability Company (LLC)

If you own a small business or are planning to start one, the simplest way to organize it is as a sole proprietorship. Registering a sole proprietorship is inexpensive, often requires no legal expertise, and filing taxes for it are relatively easy. However, sole proprietorships and partnerships, which are essentially proprietorships shared between two or more people, offer little personal protection from loss. If the business faces a lawsuit, the owner of a sole proprietorship is personally responsible for any judgement made against him. Plaintiffs might draw damages from the proprietor’s or partners’ personal savings or property. For than reason, many small businesses organize as a Limited Liability Company (LLC).

What is an LLC? What are the advantages for a business becoming an LLC?

Limited liability law defines the company itself as a business entity and creates a “shield” between the company and its owners. If the company loses a lawsuit, only its assets can be used to settle the debt and the personal assets of the owners are protected.  All 50 states and the District of Columbia now permit companies to form as LLCs, even if the company has only one owner with no employees. Owners of LLCs need not be US citizens or residents. Forming an LLC is also a good way for a company with a single owner to bring in additional partners and investors, allowing it to grow. The more formal business organization looks more legitimate to other businesses, to investors, and to clients.

What are the disadvantages for a business becoming an LLC?

For a business to become an LLC, documents must be submitted to the secretary of state, who also requires an annual filing. Each filing includes a fee. To ensure that filings are correct and that the company is properly organized, it is recommended that LLCs hire an experienced business attorney. Filing taxes can become more complex, as the company may file its own tax return in addition to the owners’ personal tax returns. Owners of an LLC must decide whether to file its tax return as a partnership, an S corporation or a C corporation. A possible exception to this is an LLC with a single owner, who can file as a proprietor and report the company’s earnings on his personal tax return.

How do I form an LLC?

  1. Draft the company’s Articles of Incorporation and register its legal name if your state allows.
  2. Decide who will be the owners and the company’s business structure. Will the owners or management handle operations? If there are multiple owners, this step is likely to require contracts, such as an LLC operating agreement.
  3. Obtain a business license and any necessary permits or certificates, if you do not already have them.
  4. Obtain an Employer Identification Number (EIN) from the Internal Revenue Service. This can be done by filing form SS-4 or by visiting irs.gov.
  5. Apply for any other business ID numbers your company needs. These requirements vary by state and you may need to consult with an attorney or expert to determine which IDs you need, such as unemployment, disability, payroll tax and others.

Does a company have to hire an attorney to form an LLC?

It is not necessary in most states. There are many companies and websites online that can help you do it. However, the advice of an attorney is highly recommended and can save you and your company costly mistakes that may cause headaches and down the road.

I have decided to register my company for limited liability. Are there advantages to forming an LLC over a corporation?

There are advantages, and the solution depends on your business goals. If you wish to remain a small business, forming as an LLC may be right for you. The primary advantages to forming an LLC over a corporation are lower cost and more flexibility, in both tax reporting options and management structure. If you wish to continue to grow the company and eventually offer shares to the public, you should consider forming your company as a corporation. It is recommended to consult with an expert who knows your industry before making a decision.

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