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.

Ready to start your LLC? Start an LLC Online Now

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.

Ready to start your LLC? Start an LLC Online Now
What Are the Tax Advantages of LLCs?

References

Related articles

Tax Differences of LLCs & PCs

A limited liability company is a company, typically with a small number of owners, known as members, that enjoys the same limited liability benefits as a corporation. All states now allow one-member LLCs; some states allow professionals to form professional limited liability companies, or PLLCs. A professional corporation, or PC is a special type of corporation designed for professionals such as lawyers and accountants. LLCs and PCs are taxed quite differently.

What Is a Disadvantage of the Corporate Form of Business Entity?

Compared to other business entities, corporations offer many advantages, such as liability protection and ease of transferring ownership shares. Though corporations are very common, a corporation may not be the best structure for every situation, and it does have some disadvantages.

LLC Vs. S Corp Profit Sharing

A limited liability company, or LLC, and S corporation are both popular business structures that usually protect their owners from liability in their personal capacities. An LLC's owners are referred to as "members," while an S corporation's owners are referred to as "shareholders." Whether you're picking the appropriate entity for a business or trying to divide the profits of an existing business, you'll need to carefully consider the profit sharing rules that govern both forms of ownership.

LLCs, Corporations, Patents, Attorney Help

Related articles

Advantages & Disadvantages of a Limited Liability Company

A limited liability company, or LLC, is an entity that offers both advantages and disadvantages to a business owner. ...

Advantages of LLC vs. an S-Corporation

A limited liability company (LLC) is a form of business organization authorized by state statutes to accommodate ...

Why Choose an LLC?

The LLC is a form of business organization that combines elements of corporations and partnerships. It is designed to ...

Is a Corporation the Same as an LLC?

At one time, there were only three options for company organizers choosing a form of business organization: the sole ...

Browse by category
Ready to Begin? GET STARTED