How to Operate an LLC

By David Carnes

Like corporations, limited liability companies, or LLCs, offer investors and owners -- called members -- personal asset protection from the demands of LLC creditors. In order to maintain this limited liability protection, however, an LLC must be run as a separate business, not as an extension of its members' personal finances. Many LLCs draft operating agreements that guide their operations, although this is not mandatory in most states.

Like corporations, limited liability companies, or LLCs, offer investors and owners -- called members -- personal asset protection from the demands of LLC creditors. In order to maintain this limited liability protection, however, an LLC must be run as a separate business, not as an extension of its members' personal finances. Many LLCs draft operating agreements that guide their operations, although this is not mandatory in most states.

Step 1

Appoint managers for the LLC. LLCs may be managed by all or some of its members. Some states allow LLC non-members to be managers.

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Step 2

Draft an LLC operating agreement and have every LLC member sign it. The operating agreement should cover capital contributions, profit distribution, voting rights, management and dissolution. Some states allow LLCs to file operating agreements with the secretary of state. Filing your agreement with the secretary of state will prevent later disputes over its content.

Step 3

Determine the LLC's tax status and file any necessary documents with the IRS. If you do nothing, the IRS will treat your LLC as a partnership, or a sole proprietorship if it has only one member. An LLC can can also choose to be taxed as a C corporation or, if it qualifies, as an S corporation. File Form 8832 to be taxed as a C corporation, and Form 2553 to be taxed as an S corporation.

Step 4

Set up a bank account in the name of the LLC, add sufficient funds to meet reasonably anticipated demands of potential LLC creditors and refrain from co-mingling these funds with the members' personal funds.

Step 5

Establish a tax withholding system if the LLC will hire non-member employees. You will have to withhold employment taxes from employee paychecks, and pay the employer portion to the IRS. You will also have to issue Form W-2 to employees after every tax year.

Step 6

File the appropriate LLC tax return every year. If the LLC has only one member, that member must add Schedule C of Form 1040 to his personal income tax return. If the LLC has more than one member and has not elected to be taxed as a corporation, it must file Form 1065 with the IRS and distribute Schedule K-1 to its members. LLCs opting to be taxed as C corporations file Form 1120, and LLCs opting to be taxed as S corporations file Form 1120S.

Step 7

Include an indication of the company's limited liability status on all company stationary and correspondence in order to preserve the LLC's limited liability status by putting the public on notice not to rely on the personal assets of members to satisfy LLC debts.

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References

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