Limited liability company business structures are available in every state. Although the laws governing LLCs are fairly uniform across all jurisdictions, there are slight variations, and you must adhere to the laws of the state in which you create the LLC. You can determine a state’s requirements by contacting its Department of State.
Most jurisdictions require you to file a certificate of organization with the secretary of state to formally start an LLC. The certificate must include the name you intend to use for the LLC, the mailing address for the initial office of the business and the name of the member who will act as the agent for the LLC. The member you elect to be the agent is responsible for receiving all legal documents that relate to the business. When choosing a name for the LLC, you must ensure that no other business entity in the state uses it. Most states allow you to access its database to search through existing business names.
One of the principal advantages to creating an LLC for business operations is that it limits the liability of members. Any debt of the LLC that does not personally relate to its members is the sole liability of the LLC. This includes any lawsuits that may arise against the company, as well as normal business debts. For example, if a customer sues the LLC in a civil suit and obtains a $2 million judgment, you have no obligation to use personal assets in the event the LLC has insufficient funds or assets to satisfy the debt. Your loss is limited to the investment you make in the LLC. However, most states provide exceptions to this limited liability in cases of fraud.
Members of an LLC can terminate the LLC’s existence at any time. Dissolution can occur in a number of ways, including unanimous vote by all members, an event that is mentioned in the operating agreement as grounds for dissolution, and if 90 consecutive days pass without a single member existing. Additionally, a single member can request a court to intervene and order the dissolution of the LLC when remaining active is no longer practical, or if the business consistently engages in unlawful activities.
The IRS automatically designates a new single-member LLC as a sole proprietorship and all other LLCs as a partnership for tax purposes. If you prefer the LLC to receive corporate tax treatment, you can make an election by completing IRS Form 8832. This form can also effectuate a change back to a sole proprietorship or partnership from a corporation. However, each election remains effective for 60 months before you can change the tax treatment again. Corporate tax treatment requires the LLC to file and pay tax liabilities separate and apart from its members. If you receive a distribution of earnings from the LLC, it is your responsibility to claim it as taxable income on a personal tax return. In contrast, partnership and sole proprietor taxation requires only one level of tax: all income and deductions flow-through to each member’s tax return.