A limited liability company (LLC) is a legal structure whereby the members of the company cannot be held personally liable for the company’s debts or liabilities. Limited liability companies are essentially hybrid entities that combine the characteristics of a corporation and a partnership or sole proprietorship. While the limited liability feature is similar to that of a corporation, the availability of flow-through taxation to the members of an LLC is a feature of partnerships.
Creating a Limited Liability Company
While each state has some differences to forming an Limited Liability Company, they all have similar general principles:
- Pick a Business Name. There are 3 rules that your LLC name needs to follow: first, it must be different from an existing LLC in your state, second, it must indicate that it’s an LLC and last, it must not include state word restrictions.
- File the Articles of Organization. The “articles of organization” is a simple document that legitimizes your LLC and includes information like your business name, address, and the names of its members.
- Create an Operating Agreement. Most states do not require operating agreements. However, an operating agreement is high recommendation for multi-member LLCs because it structures your LLC’s finances and organization, and provides rules and regulations for smooth operation. The operating agreement usually includes percentage of interests, allocation of profits and losses, member’s rights and responsibilities and other provisions.
- Get Licenses and Permits. Once your business is registered, you must obtain business licenses and permits. Regulations also vary by industry, state and locality.
- Announce Your Business. Some states require the extra step of publishing a statement in your local newspaper about your LLC formation.
Advantages of an LLC
- Limited Liability. Members are in protection from personal liability for business decisions or actions of the LLC. Therefore, this means that if the LLC collects debt or is sued, members’ personal assets are usually exempt. Furthermore, This is like the liability protections afforded to shareholders of a corporation.
- Less Record keeping. An LLC’s operational ease is one of its greatest advantages. In comparison to an S-Corporation, there is less registration paperwork and their start-up costs are lower.
- Sharing of Profits. There are fewer restrictions on profit sharing within an LLC, as members distribute profits as they see fit. Members might also contribute different amounts of capital and sweat equity. Consequently, it’s up to the members themselves to decide who has earned what percentage of the profits or losses.