The Limited Liability Company (LLC) is a comparatively new form of business entity, which started in Wyoming in 1977. It is neither a corporation nor a partnership, but combines the benefits of both. The persons who have interest in an LLC are known as 'members' rather than 'shareholders'. The liability of members is limited to their investment in the LLC. This means that they cannot be held personally liable for company debts unless they have stood a personal guaranty. Tax liability is like that of a partnership, but this may differ in the case of a single-member LLC.

The laws relating to LLCs vary from state to state, though there are attempts to bring about a national, uniform code. Software explaining individual state rules and the details of the procedures for registration and operation is available. Registration is simple and the cost is moderate. The process can be completed within a couple of days. You can either do it yourself, with the software, or entrust the job to a professional.

One (in some states) or more persons can form a LLC by filing the required papers with the Secretary of State and paying the stipulated fees. Banks and insurance companies may not qualify to register a LLC. Certain states restrict some professionals, like accountants and architects, from forming an LLC to render their services.

The management of an LLC is very flexible. The members can decide on the type of management they want. Either all the members together, a single member or a small group of members can run the company. Alternatively, an outsider (including a corporation) can be appointed to manage the affairs of the company. The management parameters are usually set out in a document known as the Operating Agreement.

Normally the voting rights would be in proportion to the interest held, but with the consensus of members it could be one member one vote. The members can also decide the guidelines for profit sharing, mode of dissolution and transfer of interest.

A properly structured LLC can be ideal for several types of businesses. That is why LLCs are gaining in popularity.

Limited Liability Company Act

In 1977, Wyoming became the first state in the U.S. to enact Limited Liability Company (LLC) legislation. This new type of business entity attracted a great deal of attention, and other states started following Wyoming's example.

After a decade, the Internal Revenue Service declared that LLCs would be taxed on the lines applicable to partnerships. This provided the LLC a combination of the limited liability of a corporation and tax advantages of a partnership. The introduction of this new guideline increased the popularity of LLCs. Now all states and the District of Columbia have their own separate acts covering LLCs.

But LLC requirements differ from state to state. For instance, in some states single-member LLCs are permitted. Others require a minimum of two members. (A person having interest in an LLC is called a 'member,' not a 'shareholder.')

The fees for completing the necessary formalities also differ from state to state. Different states use different terms, as well. The essential document for registering an LLC is known as the 'Articles of Organization' in most states. But a few of the states refer to it as a 'Certificate of Organization' or 'Certificate of Formation'. Rules relating to recognition of LLCs registered in other states also differ.

There is software available to help understand all the different states' rules, but that is no substitute for uniform laws. A move for a Uniform Limited Liability Company Act (ULLCA) began in the 1990s when the National Conference of Commissioners appointed a Drafting Committee consisting of experts in the related fields. A draft of the Act was published in May 2005. This provides for multi-state recognition of LLCs and flexible default codes.

Limited Liability Company Advantage

Limited Liability Companies (LLC) offer several advantages over corporations and partnerships. They can be registered in a very short time. The process is simple and the costs involved are not high. Basically, the Articles of Organization (in some states referred to as a Certificate of Organization or Certificate of Formation) and Operating Agreement govern the operations of an LLC. They offer a great deal of flexibility in conducting business. Any or all members can directly participate in the running of an LLC. Alternatively, that job can be left to one member or a group of them, or to a manager or managers.

The liability of members is limited to the extent of their investment in the LLC, except when a member offers a personal guaranty. In this respect an LLC is similar to a corporation. It has an advantage over a corporation in the matter of taxation. There is no double taxation because the procedure for levying taxes is like that of a partnership or S corporation. The amount realized from the sale of assets of an LLC is not usually taxable; with C corporations it is.

There are no limitations on the number of members. Some states even allow single-member LLCs. Transfer of ownership can be done according to the provisions contained in the Articles of Organization or Operating Agreement. Depending on the applicable state law, the lifespan of the organization can be perpetual or for a declared period. An LLC also offers its members' assets strong protection from claims and lawsuits.

Many changes can be introduced in the structure and operation of an LLC, with the consent of the members. This may not require the filing of additional papers. Members can decide upon the pattern of profit sharing and voting rights in any manner they choose. Unlike a corporation, there is no compulsion to keep minutes of meetings. But maintaining such records can avoid possible misunderstandings and confusion.

Limited Liability Company Formation

Forming a limited liability company (LLC) is not difficult. First of all, you must decide on the type of business, name and the location. Then check the availability of the name and reserve it if you like. The name should end with the letters LLC or other permitted abbreviations to indicate that the venture is of limited liability. The next step is to file the required forms, along with the stipulated fees. Normally the papers are to be submitted to the Secretary of State in the state where the LLC is to be registered.

Since each state has its own laws governing LLCs, the details and the fees may vary according to the location. In some states it is mandatory to insert an advertisement in a local paper declaring your intention to form the LLC. In other states, certain words like 'bank' or 'insurance' cannot be part of the name.

You can do the registration yourself. There is software available, which will help you to fill in the forms according to the rules in your area. This software is not costly.

Alternatively, professional services are available, to complete the entire procedure within a couple of days for a reasonable charge. You are in business, provided the necessary licenses and permits required for new business ventures have been obtained. You also have the option to stipulate a delayed effective date in the application is available.

The main paper to be filed is the 'Articles of Organization'. Certain states call it 'Certificate of Organization' or 'Certificate of Formation'. All members can sign the Articles, or they can authorize one person to that. This document should provide, among other details, the name and address of the LLC, its objectives, main place of business, number of shares, provisions for adding new members, names and addresses of Directors and the name and address of the Registered Agent. It is essential for each LLC to have a Registered Agent with a street address in the state where it is registered. This arrangement is mainly for receiving notices. The Registered Agent may be a person within the LLC, or an outsider.

The office of the Secretary of State in your state will provide advice and assistance to register a Limited Liability Company.

Limited Liability Company Operating Agreement

An operating agreement is the code by which Limited Liability Companies (LLC) operate. In many states an operating agreement is not compulsory because in its absence the state law will apply by default. That may not be suitable situation for many LLCs, which require specific provisions for their management.

Though an operating agreement is not required to be in writing, it is prudent to have it properly documented and signed by all members, or by the sole member in the case of a single-member LLC. This will avoid confusion and misunderstandings, and also clarify the limited liability status.

An operating agreement basically covers the rights and responsibilities of members, how the company will be managed, and the manner in which the profits and losses are to be split. Due thought has to be given to such points, because they can have long-term impact on the LLC. Apart from routine details, the major points to be covered in an operating agreement include members' voting rights, profit sharing, management, meetings, accounts, and span of life.

The voting could be either 'per capita' (each member having one vote) or according to percentage of interest the members hold (if a member has 75% of the investment, he carries 75% of the votes). Whether the profits are to be allocated in the pattern of the interest held by each member or according to some other formula should be clearly stated. There is no stipulation in state laws that an LLC should hold annual meetings or draw up reports of accounts, but it is desirable to set out rules about these.

The question of what happens if a member dies or quits has to be considered. It is better that these eventualities are adequately covered with, for example, a buy-out scheme. A clear understanding about the manner in which the members can draw the profits allocated to them is desirable. It is also important to specify how the business will be managed and what responsibilities each member will have.

Software is available to help in drawing up an operating agreement, or a legal expert can be consulted.

Single Member Limited Liability Company

Several states permit the formation and operation of a single-member Limited Liability Company (LLC). The question that arises automatically is why anyone should register himself as a LLC when he can run the business as a sole proprietary concern. The answer is simple - with a LLC he obtains limited liability protection, which means that for liabilities arising from the business, his personal assets cannot be touched. In fact, certain people exploit this position by contributing only their risky assets to the LLC and keeping the rest outside its scope.

A single-member LLC is taxed as a proprietorship. The profits of the LLC are added to the other income of the interest holder. The profits and losses can be reported on your personal tax return, in schedule C.

Even for a single-member LLC it is prudent to have an operating agreement to distinguish it clearly from a sole proprietary concern. The lenders may like to look at the operating agreement before taking a decision on your loan application. This is also likely to be helpful in case of lawsuits. The document has to be signed by the single member twice, for himself and on behalf of the company.

An additional advantage of a single-member LLC is that the interest in the company can be transferred to a beneficiary (for example, your son), without paying gift taxes. Even after such a transfer you can continue to control the company by being appointed as 'manager'. Check the details with your tax consultant.

Registration of a single-member LLC is pretty much like the procedure for a multi-member version. The necessary papers are to be filed with the Secretary of State who has jurisdiction over the area where your company is to be set up. There may be some minor differences in the forms. The required forms and checklists can be bought as standalone documents or in combo packs. If you like, you can consult a professional. There are several experts available.

Limited Liability Company Kit

Once you have decided to form a Limited Liability Company (LLC), registering it can be made easier and faster, and running it made more efficient, by using the readily available kits prepared by experts. These can be categorized as pre-operational kits and post-registration kits. Special products for single-member LLCs are also obtainable. Some are stand-alone items, while the others come in combo packs. The prices are moderate. You can choose between state-specific and generic kits.

There are books and CDs or DVDs with detailed instructions, forms and checklists for registering a LLC. Normally they contain samples of articles of organization; the operating agreement, initial worksheet and checklist to be used for finalizing the details; and a separate checklist for filing the documents. If the pertinent details were furnished, customized documents would be supplied. You can either get hard copies of the necessary forms or the software to print them.

The kits for operating the business can increase your efficiency and make it easier to ensure that you comply with all the regulations. The contents of each kit may differ from supplier to supplier. Some of the items normally included in the kit are the company seal (which is the company's signature) in a separate box , membership interest ledger, roll sheets for LLC managers and members, record books, forms for the IRS, custom-printed membership certificates, worksheets and binders.

All kits are not identical. Some suppliers offer half a dozen or more types and combinations, like economy, all-in-one, compact or deluxe. Most of them come with record binders. The company's name is often printed on the binders in gold. Usually they come in a choice of colors and types of covering.

About the Author

Limited Liability Company provides detailed information on limited liability company, limited liability company act, limited liability company advantage, limited liability company form and more. Limited Liability Company is affliated with Laws on Forming an LLC.


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