Because LLC laws vary by state, forming an LLC in certain jurisdictions might offer distinct advantages. According to attorney Richard Keyt, you should start by asking your attorney which state is the best forum for doing business. In particular, an attorney can advise you on which state provides more asset protection and whether it is worthwhile to choose a state simply because it does not tax income.
Since the federal government does not recognize LLCs as a separate class for determining federal income tax, the company’s owners, also called members, must file forms with the IRS to elect a certain business classification. A lawyer can help you understand which classification the LLC qualifies for and what the tax implications of each are. For example, some LLCs might be eligible for the more beneficial pass-through taxation that is available to partnerships. Additionally, if your state has an income tax, consult with a lawyer before setting up the business to avoid forming an entity that might be classified as a corporation for both federal and state income taxes.
Even a single-member LLC that pays just one individual to perform certain services for a day might qualify as an employer in some states and be required to comply with employer regulations. Ask your lawyer beforehand whether the services you have requested create an employer-employee relationship. If so, your lawyer can advise you on your rights to set the working conditions and your obligations to withhold state income tax from an employee’s wages.
Without state laws regulating the number of members needed to form an LLC, the owners are free to choose a single- or multi-member structure. Discuss the advantages and disadvantages of both with your lawyer before making any commitments. For example, being the only member might save you from disputes between members over how to run the business. However, as attorney Scott Edward Walker points out, a single-member entity might not protect you from personal liability for debts incurred by the LLC. An attorney can help you in the planning stages to establish proof that the LLC is separate from the individual who formed it.
Formal operating agreements, signed by each LLC member, that identify membership duties and procedures for governing the business can help resolve disputes without costly litigation. Consult an attorney during the drafting stages of this agreement to establish rules for admitting new members, preventing members from assigning their interest in the LLC to others, apportioning profits and entering into contracts with vendors.