A limited liability company (LLC) is a common type of business structure that combines features of both a corporation and a partnership. The states, and not the federal government, have general jurisdiction over LLCs and other entities. Thus, the requirements for forming it vary depending on where you are planning to operate. To find the exact requirements , visit the website of your state's agency that regulates businesses, typically the Secretary of State.
This type of company is a kind of hybrid between a corporation and a partnership. Like a corporation, it provides its owners, referred to as members, with personal liability protection in the event the business owes any debts or is involved in litigation. This means that a creditor cannot sue a member to recover debts owed by the company.
Similar to a partnership, LLCs offer greater flexibility to members when it comes to management and other related formalities. There is no requirement to have a board of directors or hold regular member meetings. These entities can also have an unlimited number of members or, alternatively, a single-member business is equally valid.
When it comes to taxation, the Internal Revenue Service (IRS) gives this type of entity the option of being taxed as a corporation or as a partnership, giving its members the flexibility to decide what works best for their particular situation. All of these reasons make forming an LLC an attractive option to entrepreneurs just starting their business.
Articles of Organization and Operating Agreement
An LLC does not become a legally recognized entity until it files its articles of organization, or equivalent document, with the state. The articles are essentially the company's registration form. It includes basic information, including the company's name, purpose, member names, and how it will be managed. Many states provide a standard form you can fill out in a matter of minutes. States typically charge a filing fee when filing this document.
While states typically do not require an operating agreement, it is a good idea to have one. This agreement is similar to a corporation's bylaws and establishes the responsibilities of each member. It often prescribes the procedures for conducting formal business matters as well as how it will be managed. A court considers an operating agreement as a legally, binding agreement. If, however, an agreement doesn't exist, the company must defer to the state's applicable default laws.
Obtaining an Employer Identification Number
Every entity must obtain an employer identification number (EIN) for federal tax purposes. The EIN is a unique number that allows the IRS to identify your business. In addition, most banks require them to have one before they can open a bank account or obtain a loan of any kind.
If you are considering forming a limited liability company, you can easily do so by following your state's relevant laws. Whether you are going to operate as the sole owner, or share ownership responsibilities with other members, ensure that you follow the required steps when forming your LLC.
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