Information About LLCs

by Jeff Franco J.D./M.A./M.B.A.
Forming your business as an LLC can provide tax, liability and membership benefits.

Forming your business as an LLC can provide tax, liability and membership benefits.

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The limited liability company entity is a creation of state law. Although the laws of each jurisdiction are similar, you must adhere to the laws of the state that governs your LLC. The LLC is also subject to the laws of any state it conducts business in; however, those laws only govern the business activities and not the actual LLC entity.

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Formation Requirements

Most states require you to submit a certificate of organization or its equivalent to formalize the creation of the LLC. The document includes the LLC’s business name, its principal office location and the name and address of a person or entity you authorize to accept legal service of process for the business. Preparation of this short document is relatively straightforward and in most cases, you can complete it within an hour. Once completed, you must deliver it to the secretary of state or its equivalent in your jurisdiction. Legal formation occurs at the moment the state files it. You must also file a certificate of authority in other jurisdictions where you conduct business. Failure to file the certificate does not preclude you from conducting business within that state, but the LLC may be denied access to that jurisdiction’s courts to settle business disputes with its residents and domestic businesses. (See Reference 1)

Membership Rights

A member of the LLC has certain rights that jurisdictions view as unconditional and inherent in a membership interest. A member has the right to actively engage in LLC business with equal power and authority of all other members. An owner also has a proportional interest in business assets and earnings of the LLC. However, provided it does not violate state law, members may draft an operating agreement that enhances or restricts any of these rights. The agreement is only enforceable if the members agree unanimously on each clause.

Personal Liability

The benefit that frequently encourages business owners to create an LLC is the personal liability protection it offers. All debts and obligations of the business are the sole responsibility of the LLC entity, separate and apart from its members. In the event the LLC is unable to satisfy all obligations, members need not contribute additional money or property to the LLC. However, any third party with a valid legal claim against the LLC may seek a judgment against all assets of the business. One consideration that owners of a single-member LLC must be aware of is that some state courts have disregarded the LLC entity as being separate from the owner and impose personal liability for bona fide business obligations.

Federal Income Tax

In addition to state requirements, the LLC must adhere to all federal tax law regulations. The IRS subjects all multi-member LLCs to the same reporting and payment requirements as a partnership. If the LLC has only one member, the member disregards the entity and reports all tax on a personal income tax return as a sole proprietor. However, any LLC may elect corporate tax treatment, which requires members to treat the LLC as a separate taxpaying entity that is responsible for all tax filings and payments.