Rules for an LLC

by John Barron

A limited liability company is a hybrid form of business organization that combines aspects of a corporation with the pass-through tax advantages of a partnership. Certain statutory requirements govern the manner in which an LLC is organized, as well as the manner in which it will be taxed. Although members of an LLC have flexibility in how they manage and control the business, following certain guidelines will help ensure that the business is operated efficiently and without interruption.

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Articles of organization

An LLC is formed by filing articles of organization with the Secretary of State’s office in the state the LLC will use as its principal place of business. In most jurisdictions, the articles of organization must include the name and address of the LLC, the name and address of the LLC’s registered agent -- an individual authorized to receive legal documents on behalf of the company -- and the names and addresses of the owners of the LLC. Most states require a filing fee upon submission of the articles of organization.

Features

Members of an LLC enjoy limited liability protection similar to that given to shareholders in a corporation. Except in cases where a loan is personally guaranteed, members of an LLC are generally not liable for the debts of the business. Though it shares attributes with the corporate form of organization, an LLC enjoys the advantages of pass-through taxation. Thus, an LLC eliminates double taxation of earnings distributed to its members.

Taxable status

Owners of an LLC have flexibility in determining how the entity will be taxed. Members of an LLC can chose to have the business taxed in one of four distinct ways: as a partnership, as an S- or C-Corporation, or as a sole proprietorship. A single-member LLC will be taxed as a sole proprietor. Members of an LLC must elect their taxable status 75 days after formation of the company.

Operating agreement

In the absence of an agreement to the contrary, if one of the members of an LLC leaves the business, the LLC is generally dissolved by operation of state law. Many LLC’s execute an operating agreement to provide for continuity in the life of the business even if one of the members departs. An operating agreement governs the manner in which the LLC will be managed and controlled. Typical provisions of an operating agreement will address the rights and responsibilities of the members, as well as which members shall operate and manage the business.