Regulations for Limited Liability Companies

By David Carnes

Limited liability companies, or LLCs, are versatile business vehicles that were designed to take advantage of some of the best features of both corporations and unincorporated entities. Since LLCs are created under state law, regulations governing LLCs vary somewhat from state to state. Nevertheless, the basic principles governing LLCs are the same in every state.

LLC Name Selection

Every LLC must have a unique name that clearly indicates it limited liability status. In most states, a person can check to see if the LLC's name is unique by using a name search function on the state Secretary of State's website. The LLC name must include a designated suffix such as "LLC", "limited liability company" or "Ltd."

Formation

In order to form an LLC, Articles of Organization must be filed with the state Secretary of State. These documents are short, contain basic information and are roughly equivalent to a corporation's Articles of Incorporation. A registered agent must be appointed and a registered street address selected so that the state government can send official communications to the LLC. The Office of the Secretary of State will also need the names of the LLC members, along with certain other information that varies from state to state. Many states offer fill-in-the-blank forms that can be downloaded from the Secretary of State website. A filing fee of up to several hundred dollars is charged upon filing.

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Taxation

Most states impose annual fees on LLCs formed under their state's law. Some states impose moderate levels of tax on LLC income or profits derived from activity within the state. The IRS will treat the LLC as a disregarded entity or a partnership, depending on whether it has one member or more than one member, respectively. An LLC may elect to be taxed as a C corporation, and if it qualifies, it can elect to receive S corporation tax treatment.

Management and Operations

An LLC does not have to appoint a board of directors and does not have to keep minutes of meetings. It may be member-managed, or it may be managed by non-members. Some states require at least one manager to be a member. Since LLCs are not nearly as densely regulated as corporations are, they have broad freedom to operate as they see fit. Nevertheless, certain restrictions apply; in many states, for example, an LLC may not require the unanimous consent of members to dissolve itself. Management and operational policies should be spelled out in an operating agreement, although this is not required by law.

Transfer of Shares

An LLC operating agreement can specify policies for the transfer of member shares. It may require, for example, that an LLC member offer his shares to the other members before selling them to a non-member. It is also acceptable for an LLC to allow a member to assign the economic benefit of his shares to a non-member while retaining his voting rights.

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References

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