Limited liability company laws have been enacted in every state for the same basic purpose – to authorize the creation of a hybrid business entity that combines a corporation’s liability protection with the tax and management benefits of a partnership. LLC laws are fairly new with the first laws enacted in 1990. A comparison of LLC laws between the states discloses that, despite a same basic purpose, these laws differ significantly in a number of areas, from the amount of filing fees and formation requirements to whether certain types of LLCs can be formed at all.
The LLC laws in every state specify the requirements to form an LLC which, at a minimum, includes filing a document with a state agency and paying a filing fee. The document is typically called articles of organization, although sometimes referred to as certificate of formation or certificate of registration. The information required to complete the formation document can be as minimal as simply stating the LLC’s name, such as in Georgia, or requiring more substantive information, such as the purpose of forming the LLC, its principal address, and the names and addresses of its registered agent, its manager and members. The filing fees are also quite varied, from $100 in Georgia to $500 in Illinois. A comparison of formation requirements in all states generally shows the requirements falling within these two extremes.
A specialized form of LLC that can be formed in some states is a series LLC. In 1996, Delaware became the first state to amend its LLC laws to permit formation of a series LLC; however, as of 2010, just seven more states followed suit: Illinois, Nevada Oklahoma, Iowa, Utah, Tennessee and Texas. A series LLC allows business owners to form one LLC that can create independent series or cells within the LLC. Each series can have its own assets, managers and members. The liability of one series cannot affect the profitability or become an obligation of another series. The state of California indicates that it will permit series LLCs to conduct business within the state, although its LLC laws do not allow the formation of such an LLC.
Another specialized form of LLC that is permitted in a few states is a low-profit LLC, sometimes designated as L3C. In 2008, Vermont became the first state to enact low-profit LLC laws, followed by Michigan, Utah, Wyoming and Illinois. The purpose of low-profit LLC laws is to provide a fairly simple and less expensive business structure for investments that are intended primarily for charitable or educational purposes, yet are designed to make a small profit.
Forming an LLC Out of State
With the exception of series LLCs and low-profit LLCs, business owners can seemingly choose from any state to form an LLC. States with LLC laws that have low filing fees and less rigorous formation requirements may appear a more attractive alternative to the LLC laws in the state where your business is located. However, consideration must also be given to the requirement that you may have to register your LLC in the state where it conducts business, although it was formed in another state. For example, California LLC law requires a $70 filing fee to be paid to the Secretary of State, as well as a yearly $800 payment to the Franchise Tax Board. Although it may appear to be advantageous for a California business to form its LLC in a state that does not impose a franchise tax, in order to legally do business in California, the LLC will have to register with the Secretary of State. This requires payment of a registration fee, as well as payment of the same $800 franchise tax. In fact, since an LLC formed out of state will be considered a foreign business, it may be subject to additional taxes on income produced in California.