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Limited Liability Company (LLC)

 

Frequently Asked Questions regarding LLCs

  1. Why form a LLC?
  2. How does the LLC management structure work?
  3. Who can form a LLC?
  4. Which business structure is better, a LLC or Corporation?
  5. What are the differences between a corporation, LLC, sole-proprietorship, and partnership?
  6. Should I form my LLC in a different state?
  7. Do I need an attorney to form a LLC?
  8. What is a Registered Agent?

1. Why form a LLC?
Below are some of the benefits of forming a LLC:

  • The owners are protected from the LLC’s debt, lawsuits, and other business related liabilities.
  • Generally, there are no ownership restrictions.
  • Flexible tax structure. LLCs can choose to be taxed as a sole-proprietorship, partnership, C-corporation, or S-corporation.
  • In most states, LLCs can have a perpetual life. This means that the business continues to exist even if the owners leave the company or dies.
  • Flexible management structure. The LLC can be structured as a “member-managed” LLC (all owners will manage the company) or a “manager-managed” LLC (the owners will elect a manager to manage the company).
  • Generally, there are no annual meeting requirements for a LLC. This means less formalities.
  • The LLC structure can help develop credibility and professionalism.
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2. How does the LLC management structure work?
In order to understand the LLC structure, you must first understand the key players and their role in the LLC.

LLC Key Players Role in the LLC
Members Members are the owners of the LLC.
Managers The managers are responsible for managing and running the LLC.
Officers Although not required for LLCs, the managers of an LLC may hire LLC officers to assist with the day-to-day business activities. The typical officers are a President, Vice-President, Treasurer, and Secretary.

In a LLC, there are typically two types of management structures. Below is an overview of those two structures.

Member-Managed: This is the most popular management method. In a member-managed LLC, the members a.k.a. owners will take the role as manager and run the LLC. Afterwards, they may hire LLC officers to assist them with day-to-day business activities.

Manager-Managed: In a manager-managed LLC, the members a.k.a. owners will select one or more individuals to act as the manager and run the LLC. Afterwards, the managers may hire LLC officers to assist them with the day to day business activities.

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3. Who can form a LLC?
Generally, there are no ownership restrictions for a LLC. However, under certain tax structures, there are some ownership restrictions. Below is a summary:

  • Taxed as a Sole Proprietorship a.k.a. Disregarded Entity: This structure can only be selected if there is only one (1) owner. The owner may be a natural person, foreigner, other legal entity, etc. Furthermore, a husband and wife ownership in a community property state is considered as one (1) owner and may also select this option.
  • Taxed as a Partnership: This structure can only be selected if there is more than one (1) owner. The owner may be a natural person, foreigner, other legal entity, etc.
  • Taxed as a S-corporation: There are some strict ownership restrictions for LLCs choosing to be taxed as a S-corporation. Click here for a summary of the S-Corporation ownership restrictions.
  • Taxed as a C-corporation: There are generally no ownership restrictions for this structure.
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4. Which business structure is better, a LLC or Corporation?
Below is a brief overview of the common reasons why some businesses choose one structure over the other:

  • LLC: The LLC structure is very flexible when it comes to tax structures and management options. A LLC can be taxed among any structure which it qualifies for. The LLC can also choose a “member-management” structure which resembles a partnership or a “manager-management” structure which resembles a corporation. Additionally, LLCs have less ongoing formalities such as no meeting requirements. However, not all professions can be structured as an LLC; some states do not allow professional services such as doctors to form an LLC.
  • Corporation: A corporation is an older business structure and is generally recognized in all professions. The corporate structure is more formal and requires annual meetings (some people prefer formal management). A corporation is limited to only two tax structures: (1) a C-corporation or (2) a S-corporation. Since the corporate structure is much older, it has a larger body of case law which can help with quick and predictable results from governance lawsuits.
Businesses that prefer more flexibility and fewer formalities are usually better suited as a LLC. Conversely, businesses that prefer to operate much more formally are better off as a Corporation.

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5. What are the differences between a corporation, LLC, sole-proprietorship, and partnership?

  Sole Proprietorship Partnership LLC S-corporation C-corporation

Ownership

Requirement
1 owner. 2 or more owners. 1 or more owners.

Between 1 to 100 owners. Click here for details.

1 or more owners.
Liability Protection No, the owner is personally liable. No, the partners are personally liable. Yes, generally the owners are protected from personal liability. Yes, generally the owners are protected from personal liability. Yes, generally the owners are protected from personal liability.
Perpetual Existence No, this structure ends when the owner dies or withdraws. No, this structure ends when the owner dies or withdraws. Maybe, a LLC’s life will depend on the state of formation. Yes, a corporation continues to exist after an owner dies or withdraws. Yes, a corporation continues to exist after an owner dies or withdraws.
Taxation Profits are only taxed at the individual level, also known as “pass through taxation.” Profits are only taxed at the individual level, also known as “pass through taxation.” Flexible tax structure (LLCs can choose to be taxed as a sole proprietorship, partnership, S-corp, or C-corp). Profits are only taxed at the individual level, also known as “pass through taxation.” Profits are taxed at the corporate level and any profits distributed to the owners will be taxed again at the individual level, also known as “double taxation.”
Self Employment Tax Yes, profits are typically subject to SE Tax. Yes, profits are typically subject to SE Tax. Yes, profits are typically subject to SE Tax. No, profits are typically not subject to SE Tax. No, profits are typically not subject to SE Tax.
Passive Investment Income Yes, this structure can be used for passive investment income (i.e. rental income, royalties, etc.). Yes, this structure can be used for passive investment income (i.e. rental income, royalties, etc.). Yes, this structure can be used for passive investment income (i.e. rental income, royalties, etc.). No, this structure is not ideal for passive investment if the investment income exceeds 25% of the company’s gross profits. Yes, this structure can be used for passive investment income (i.e. rental income, royalties, etc.).
Professional Services Yes, this structure can be used professional services (i.e. doctors, lawyers, etc.) Yes, this structure can be used professional services (i.e. doctors, lawyers, etc.) Maybe, it will depend on the state where business is being conducted. Yes, this structure can be used professional services (i.e. doctors, lawyers, etc.) Yes, this structure can be used professional services. However, there is a special federal PSC 35% flat tax.
Formalities Few formalities. Business must comply with DBA laws. Few formalities. Business must comply with DBA laws. Must comply with state reporting requirements, if any. Corporations must hold annual meeting and comply with state reporting requirements. Corporations must hold annual meeting and comply with state reporting requirements.
Disadvantages No liability protection and must also pay SE tax on income. No liability protection and must also pay SE tax on income. Higher start-up cost, more formalities, and higher maintenance cost. Higher start-up cost, more formalities, and higher maintenance cost. Higher start-up cost, more formalities, higher maintenance cost, and double-taxation.
Advantages Few formalities and low start-up costs. Few formalities and low start-up costs. Few formalities and low start-up costs. Few formalities and low start-up costs. Personal liability protection and the ability to retain earnings and to split income.
Usage Personal liability protection and the ability to retain earnings and to split income. Personal liability protection and the ability to retain earnings and to split income. Personal liability protection and the ability to retain earnings and to split income. Personal liability protection and the ability to retain earnings and to split income. For businesses that want personal liability protection and prefer to keep some or all of the profits within the business


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6. Should I form my LLC in another state?
Most small businesses will form a LLC in their home state (the state where their business is located). Filing in another state will usually require more paperwork, additional maintenance fees, and additional state taxes.

If you intend to conduct business in only one state and do not expect any major LLC governance issues (owner/investor disputes, manager/officer disputes, company policy disputes, etc.), then you should consider forming a LLC in your home state. This is because the additional paperwork, fees, and taxes usually outweigh the benefits of forming a LLC in a more business friendly state.

However, if the LLC will seek funding from venture capitalists, professional investors, or expect major LLC governance issues, then you should consider forming a LLC in a more business friendly state (i.e. Nevada, Delaware, etc). The major benefit of forming a LLC in another state is the quick and predictable results from LLC governance lawsuits.

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7. Do I need an attorney to form a LLC?
No. You can always prepare and file your own formation documents. My Legal Depot can help you form a LLC and save money on attorney fees. However, if you need legal advice, you should consult an attorney.

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8. What is a registered agent?
All LLCs must designate a registered agent who is available during normal business hours to accept notices and documents. The registered agent may either be: (1) an adult individual residing in the state of incorporation OR (2) a company authorized by the Secretary of State to serve as agent - such as My Legal Depot.

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