All 50 states and the District of Columbia authorize the creation of all business entities within their jurisdictions. Popular entity structures include corporations, partnerships and limited liability companies. Choosing an LLC may provide business owners with benefits not available with other entity forms. However, you must consider your individual needs and the type of business operation before selecting one.
When you create an LLC structure, owners, who are known as members, draft an operating agreement to govern all aspects of LLC operations. An operating agreement is not required in most states, but is advisable as it gives the members significant power to operate the business with minimal government intervention. Generally, there must be unanimous consent among all current members to approve the agreement. However, the agreement may stipulate that further amendments only need the consent of a majority of members. The agreement commonly deals with issues such as how profit distribution allocations are made, restrictions on the types of transactions into which the LLC may enter, the level of management authority each member has and the requirements for admitting new members.
Members of an LLC have the right to actively participate in the daily operations of the business. Unless the operating agreement stipulates to the contrary, all members receive an equal vote and identical authority to manage the LLC. In the event the LLC members agree to hire employees to manage the business, each member retains the right to vote on which employee to hire, oversee an employee’s performance and make decisions on important business transactions that may result in fundamental changes to the business.
Personal Asset Protection
Business owners frequently create an LLC because of the protection it provides to the personal assets of members. The LLC is solely liable for the transactions into which it enters. Members have no requirement to contribute additional capital to the LLC when insolvency is imminent and the business is unable to meet debt and contractual obligations. However, a member may incur personal liability for transactions that bind the LLC when they have no authority to do so. Generally, these transactions must be beyond the scope of normal business operations. It does not include transactions where the member acts in good faith and within the scope of his authority, but results in a loss to the LLC, regardless of the amount.
An important benefit of an LLC structure is the flexibility the IRS affords it in choosing the form of taxation to which business profits are subject. The federal tax law automatically designates the LLC as a partnership if it has more than one member, and a sole proprietorship if not. Both forms of taxation offer flow-through taxation that imposes a single level of tax on each member for their proportionate share of business income and loss. However, LLC members can elect corporate tax treatment by timely filing IRS Form 8832, which imposes all tax requirements on the LLC itself rather than its members.