Limited Liability Companies (LLC) are business entities that got their start in 1977 and are considered to fit somewhere between sole proprietors/partnerships, and fully incorporated companies. Existing to fill the gap between corporations and sole proprietors LLCs can help to segment personal and business assets and liabilities while at the same time maintaining a simplified tax structure. An LLC is not corporations but is a company structure to operate like a corporation. Here is the formation of an LLC.
An LLC is in itself its own legal entity so long as it is treated as one. The LLC can assume obligations of debt. In other words the LLC, not the members, hold a loan and the liabilities that go along with it. If however the members of an LLC use the entity as their personal bank or for personal matters it is possible that the LLC will not be recognized as a separate entity if a lawsuit is filed.
As far as taxes go LLCs are considered by the IRS as pass-through entities. This means income passes through the business and goes straight to the LLC members just as they would with a sole proprietorship or partnership. These profits or losses are filed on each individual’s tax return. A caveat to this is that LLCs can be taxed as a corporation if the members elect to do so. So, if treated appropriately an LLC can shield its members from the liabilities of a corporation without assuming the tax overhead a true incorporation must maintain.
How to File
If you are thinking about forming an LLC for your business, spend the next 20 minutes educating yourself on the difference between Sole proprietorships, LLCs, and S corporations. My guess is that for most people starting out as a sole proprietorship will be sufficient for current needs and much cheaper than filing for an LLC.
If you have done your homework and have decided that an LLC is the way to go, what next? The steps to filing an LLC are not complex and although requirements vary from state to state, setting up an LLC is a simple process that can usually be done in an hour.
Articles of Organization
The first step is to contact your secretary of state and obtain the required form for filing a LLC. In some cases this will be a simple fill in the blank form. The state of Washington for example has an online application. The processes guides you through establishing a legal name, completing the certificate of formation, establishing the registered agent, defining the members, and guides you through the initial annual report. The fee for WA is roughly $200.00, additional costs may apply depending on how you file. Google your secretary of state to find out more of the specifics.
As you fill out your articles of organization you will be required to define the registered agent for the LLC. In most cases this will be you. The registered agent is the person or business that is designated to receive important documents on behalf of the LLC. The most appropriate individual for this is generally the one spear heading the business.
The operating agreement is the internal agreement between the members of the LLC. It is not required to form the LLC but it should be drafted to state the rights and responsibilities of the members.