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How to form an LLC as per Limited Liability Companies Law

limited liability companies law

By Ava SanghviaPublished 3 years ago 11 min read
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Here’s everything you need to know about limited liability companies laws: how it gets formed, advantages, disadvantages, and regulations as per limited liability companies law.

Limited Liability Company is the most usual form of business form found in the United States.

LLC is a blend of partnership and corporation. Such a hybrid character of LLC has become a popular alternative for business owners over the years.

What is a limited liability company?

A limited liability company is often a business form chosen by those just starting with their newly formed business.

Suppose you are planning to incorporate a business under the limited liability companies law. In that case, it is essential to have in-depth knowledge about limited liability companies, advantages, disadvantages, and every aspect relating to an LLP.

Let’s understand what an LLP is.

An LLC is a hybrid of partnership and corporation. The LLC combines the benefits of pass-through taxation, much like an S corporation, and has the perks of limited liability.

But the LLC’s legal structure is much more convenient for the business owners, making many companies believe that the S corporation has too many restrictions to take advantage of its benefits. Read more about S corporation on getlegal.com.

A limited liability company, a legal entity created by a single person as per limited liability companies law in usual circumstances, may have more than one partner or owner that runs the business together.

A limited liability company enjoys many benefits through taxation. It keeps liability away from the owner of the company’s partners so that the partner’s or owner’s assets are protected when litigation occurs.

Unfortunately, the disadvantage of a limited liability company may include the difficulty or inability to change the limited liability company into a corporation when the time comes.

Another downside of an LLC is there are only so many shareholders these entities may possess. Limited shareholder possession means shares, interest, or stock of an LLC is limited as per the limited liability companies law.

Steps to form an LLC as per limited liability companies law

Choosing a name for LLC

The limited liability company name must comply with the state’s rules. While the limited liability companies law differs from state to state, most states require the following:

The name of the LLC should end with an LLC designator, such as a limited liability company, a limited company, or an abbreviation of one of these phrases.

The LLC name should not be identical to the name of another LLC or business entity already registered within the state.

Filing of articles of organization

It is essential to file articles of organization with the state’s corporate filing office, often the secretary of state, to create an LLC.

Some states of the United States, such as New Hampshire, New Jersey, Washington, Delaware, and Mississippi, use the term “certificate of formation” instead.

Pennsylvania and Massachusetts are the other two states that call the document a “certificate of organization.” Click here to read more about the specific requirements for forming a Limited liability company in your state.

Ass per the limited liability companies law, articles of the organization can usually get completed online or through a form available on the Secretary of State’s website.

To fill the form, one needs the LLC name, LLC registered agent’s address, basic information like how the LLC will get managed, and the LLC owners’ name to fill the form. A filing fee needs to get attached to the form, which is typically around $100 in most states.

Choosing a registered agent

Limited liability companies have a registered agent, an individual, or a company that agrees to accept legal papers on behalf of the limited liability company if it gets sued.

As per the limited liability companies law, a registered agent must have a physical street address in the state where the LLC gets registered.

Most states in the US maintain a list of registered commercial agents (private sector companies) that will act as agents for the service of the process for a fee. A limited liability company member can act as a registered agent for the LLC.

Deciding on member vs. manager management

Small LLCs mostly choose to be managed directly by their members. LLCs have an option to appoint one or more people to manage the LLC – selecting such people from outside of LLC to manage the LLC is similar to a board of directors overseeing a corporation. Managers vote on crucial issues such as purchasing real estate, taking out a loan, or changing strategic plans.

Creating an LLC operating agreement

Most of the states don’t require an LLC operating agreement. An LLC operating agreement, an internal document, establishes how an LLC will run, including how the LLC will get managed. State law will govern the operations of an LLC in the absence of an operating agreement.

Complying with tax and regulatory requirements

In most states of the US, these additional tax and regulatory requirements apply to an LLC as per the limited liability companies law:

Employer Identification Number (EIN):

If an LLC incorporates more than one member, it must obtain its own IRS EIN, even if the LLC has no employees.

If the LLC gets formed with only one member, such LLC needs to get an EIN only if the LLC will entail employees or the member of the LLC elect to have it taxed as a corporation instead of a sole proprietorship.

It’s essential to complete an online Employer Identification Number application on the IRS website to obtain EIN.

Business Licenses:

Depending on the type and location of the business, an LLC may need to obtain other local and state business licenses.

Checking with the appropriate state agencies to ensure that the LLC is properly registered, licensed, and permitted to do business in the state is advised.

Sales and employer taxes:

If the business registers, sell goods, collects taxes, or has employees, such LLC needs to register with the appropriate state taxing authority.

Filing of annual reports

In the United States, many states require an LLC to file an annual report attached with a filing fee as per limited liability companies law.

Out of state limited liability company registration

An LLC needs to get registered and appoint a registered agent for process service, to conduct business activity in a state other than where LLC got formed.

For more information about How to form an LLC as per Limited Liability Companies Law, visit getlegal.com

The Characteristics of an LLC

Limited liability

An LLC, as per limited liability companies law, offers limited liability protection to its members.

LLC members are only liable for their own actions, unlike a partnership business, where one partner of the business can be held liable for the acts of other partners. LLC members cannot be held responsible for civil wrongs and torts committed by other company members.

Owners as members

As per limited liability companies law, the members are LLS owners. The members of the LLC have the option of either managing the company by themselves or can appoint one of the members to manage the day-to-day operations of the company. The members can also select a professional manager.

Separate legal existence

A limited liability company has a separate legal identity from its owners.

An LLC can enter into contracts in its name and legally transact business. And it can also institute lawsuits and own property as a separate legal entity.

Limited liability company exists even after the retirement, death, termination, or withdrawal of one or more members.

Flexibility in taxation

When it comes to tax treatment, LLC offers much flexibility. LLC taxes must be filed either as a partnership if the LLC is a multi-member LLC or as a sole proprietorship if the LLC is a single-member LLC since the IRS does not recognize LLCs as separate legal entities.

Simplicity in formation and operation

While giving the benefits of a corporation, an LLC gives the simplicity of partnership business in LLC formation and operation. Formation formalities and filing requirements are kept simple for LLCs in limited liability companies law.

In most of the states of the US, an LLC is not supposed to hold an annual meeting of members and does not require filing the minutes of the meeting. LLCs are either managed by a member or a manager and thus do not have a board of directors. LLCs also need very little record keeping when compared to corporations.

Types of limited liability companies

Single-member LLC –

This type of LLC is not treated as a separate entity from its owner for tax purposes.

Multi-member LLC –

This type of LLC, as the name suggests, has more than one member. Multi-member LLC gets managed as a separate entity from its members for tax purposes, unlike single-member LLC.

Non-profit LLC –

This LLC enjoys the same tax advantages as a non-profit corporation. A non-profit LLC also enjoys the flexibility of a partnership and the protections from liability. All states of the United States allow non-profit limited liability companies.

PLCC –

A Professional Limited Liability Company is an LLC organized for the purpose of providing medical, legal, or any other professional service.

SLCC –

A Series Limited Liability Company is an exceptional LLC that allows a single LLC to segregate its assets to protect it from company creditors. The assets in an SLCC get segregated into different series.

Limited liability companies tax and business law

LLC tax and business law is an analytical and comprehensive publication. It addresses the critical issues facing practitioners regarding the formation, operation, and dissolution of a limited liability company and other limited liability vehicles such as limited liability and limited liability partnerships.

The limited liability companies’ tax and business law address the state rules for LLC and their impact on tax planning for these non-tax entities and federal tax.

Limited liability companies law and regulation from the IRS

Limited liability companies are not recognized as entities for taxation purposes by the IRS. Therefore tax filing of an LLC is an easy process, although the process depends on the count of members that the LLC has. The LLC also has the right to elect to file as a corporation.

An LLC, considered a disregarded entity if it only has one member, is considered a partnership if it has more than one member. Most LLC in the United States does not pay income tax at the corporate level unless the LLC elects to get taxed as a corporation.

In the United States, states do not always follow the regulations laid down by IRS for taxation purposes. Therefore, the LLC owners need to be aware of the state rules as well.

Limited liability companies advantages and disadvantages

Advantages

Avoiding Double Taxation

Like S corporations, Limited Liability Company gets exemption from the double tax as per the limited liability companies law. In simple words, the profits of LLC pass through to the company’s members who need to report their part of profits on personal federal tax returns. It means the company itself does not pay a dime as tax.

Limited Liability

Like corporations, limited liability companies provide their members with protection from responsibility to the company’s debts. LLC members are only liable to the extent of their investments in the LLC.

No Ownership Restriction

As per the limited liability companies law, forming an LLC avoids the biggest drawback of forming an S corporation – the restriction on the number and type of shareholders that the corporation may have. An LLC has no limit on the number of members, and the members of it can be a foreign national or other company.

Other benefits of a limited liability company include:

The flexibility of income distribution

Limited liability companies law consider LLC as a separate legal entity

Disadvantages

Exclusions

A few types of entities cannot get organized as an LLC as per limited liability companies law. The entities include insurance companies and banks.

Complicated interstate business

Limited liability companies laws vary from state to state. It complicates the business across state lines. No uniform laws concerning LLC are in place. So the owners of the LLC should have greater knowledge of the state laws for the LLCs that carry business in more than one state.

Other disadvantages of a limited liability company are:

Now also, LLCs are a very new option in many states; this means that the statute governing LLCs are still evolving

At least one person has to act as a general partner

A considerable amount of documentation and paperwork is required

The partners have to pay expensive self-employment taxes

Attendance of meetings is necessary for compliance

To Conclude –

Limited liability companies are widely being accepted in the United States. It is believed that the limited liability company will become the preferred way of operating both small and large businesses.

As per limited liability companies law, an LLC does not require formal rituals like shareholder meetings and directors, unlike a corporation. An LLC allows owners to participate in the management of the business, unlike a limited partnership.

An attorney can help use a limited liability company to start a new venture or simplify the structure of an existing business

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