Frequently ask questions for LLC
A Limited Liability Company or LLC is a hybrid of a partnership and a corporation, offering an alternative to partnerships and corporations by combining the corporate advantages of limited liability with the advantages of pass-through taxation that exist in a partnership. It is also a rather recent creation, with some states creating statues acknowledging LLCs within the last 10 years, where as corporate statutes have been in existence in states such as Delaware for over 200 years.
An INC and LLC have many differences. Here are a few of them:
- LLC's often have a finite life time vs. INC's are perpetual
- INC's have shareholders (owners) vs. LLC's have members
- Some states require at least two members (owners)
- LLC members are often not able to transfer their LLC interest without consent of other members vs. INC shareholders are generally free to transfer their shares
- Those in authority are called either Members or Managers vs. Officers or Directors for a Corp.
- LLC's are granted the flexibility to be taxed as a partnership (default) or a corporation by the IRS. See IRS Form 8832
To file a LLC, most states require only the filing of Articles of Organization along with paying the states filing fees.
SmallBiZ.com prepares your Articles of Organization, files them with the state of your choice, and pays the minimum initial filing fees (Expedited Service may include additional state fees). You only need to complete our simple online order form, which asks only what the state requires to form your LLC.
No! An attorney is not a legal requirement for forming a LLC in any state. You can prepare and file the articles of organization yourself; however, you need to be thoroughly versed in the laws of your state.
In spite of their seemingly high hourly fees, a good corporate attorney can be a valuable resource to your small biz. If you are unsure of what steps your business should take and you don't have the time to research the mater yourself, even the cost of one hour's consultation can pay off handsomely later. Just remember to bring lots of questions.
Once you have decided, SmallBiZ.com can form your LLC and save you money.
First and most important, we recommend that you spend some time coming up with a name for your LLC. Although each state has different rules concerning the naming of your LLC, the most common rule is that it must not be deceptively similar to another already formed company. The LLC name must include a suffix. Some examples are "Limited Liability Company", "LLC", and "L.L.C." However, your state may have different suffix requirements. Check the State Research area to get more details about your state. For more information about naming your LLC read, The Importance of a Good Name.
Other than in Massachusetts, only one member is required to form a LLC. The IRS looks at single member LLCs a little different than they do multi-member. By De The IRS does allow one member LLCs to qualify for pass-through tax treatment; however, taxation of one person LLCs at the state level may be different.
In most circumstances, it is best to form your LLC in the state in which you are operating. However, there may be good reasons to form in another state, such as Delaware or Nevada. For more information, see INC in DE, NV or Not?
Even though your LLC was formed in one state, you will be recognized as a valid LLC in other states. However, if you are operating in another state, you may be required to register your LLC in that other state. For more information on this, see What is Nexis - You Need to Know This!
Although there are exceptions, generally the LLC is responsible for the company's debts, protecting the members from individual liability.
Like corporate bylaws & a partnership agreement, an Operating Agreement spells out how your LLC is managed, who has authority to do what, how ownership is registered, the percentage of ownership, etc. Although generally not a requirement, an Operating Agreement is vital in a multi-member LLC. An Operating Agreement is generally a private document and unlike articles of organization, no state agency requires it's filing or publication.
Although most states' LLC laws don't require a written operating agreement, you shouldn't consider starting your business without one. Here are a few reasons why having an operating agreement is necessary:
- Sometimes banks or vendors will require seeing your Operating Agreement before doing business with you.
- Sets out rules that govern how profits will be split up, how major business decisions will be made, and the procedures for handling the departure and addition of members.
- Keeps your LLC from being governed by your state's default LLC laws, which might cause adverse taxation.
- Helps to avert misunderstandings between the owners over finances and management.
- Courts will be more likely to respect your personal liability protection by showing that you have been careful about organizing your LLC.
SmallBiZ.com provides a 43 page Operating Agreement on CD for only $25.00 or FREE with the purchase of our Deluxe LLC Kit. Call us toll free 1 (866) 2INC NOW or 1(866) 246-2669 to order.
A LLC is owned by its members vs. shareholders in a corporation or partners in a partnership. A member's ownership of an LLC is represented by their "interests" , just as partners have "interest" in a partnership and shareholders have stock in a corporation.
A LLC may be managed by its members (owners) or by managers. If the LLC is to be managed by its members, it operates like a partnership, with each member having an equal say in the decision making process of the company. If the members choose to elect a manager or managers, then the managers will be acting in a capacity similar to a corporation's board of directors or the general partners of a limited partnership. These managers are in charge of the overall affairs of the LLC.
Member management is the normal default rule of state law. In other words, if managers are not selected in the articles of organization the members will direct the affairs of the LLC. Also, if the articles do not name the members or managers of the LLC, the Operating Agreement will do so.
Keep in mind that taxation of LLCs are handled differently by each state. Some look at LLCs as the same as a corporation, some as if it were a partnership, and some base their taxation on how the IRS views your LLC.
The IRS has granted some flexibility in this area although by default they will tax your LLC this way:
Disregarded Entity - As a single member LLC, the IRS will consider all income and expenses to pass through to your personal return. Your expenses will be shown on a Schedule C and your income on front page of your 1040, just like a sole proprietorship. Self-employment taxes on LLC net income must be paid just as you would with any self-employment business.
Partnership - As a multi-member LLC, the IRS will expect that you file a Form 1065 Partnership Informational Return and K1's for each member spelling out the distributive net profit or loss each member shall show on their 1040. Therefore, each member experiences a similar pass through benefit, which simply reported differently.
If you want your LLC to be taxed as a corporation instead of the "default" you must file an IRS Form 8832 Entity Classification form. The IRS will then tax your LLC's net income just as a corporation. Please note: The state you are in may regard your LLC differently than the IRS does. In California, the state requires ALL LLCs to pay the minimum franchise tax of $800, regardless of income, 3 months AFTER formation of your LLC. If you do not pay this tax with in the 3-month period, they will penalize your LLC and potentially revoke its charter.
LLCs offer numerous advantages.
- A LLC is not required to have annual meetings and keep minutes of meetings like a corporation.
- LLCs allow for pass-through taxation (LLC earnings ae taxed only once). This is similar to the treatement of partnerships, sole proprietorships and most S corporations.
- The LLC owner's liability is generally limited to the assets of the LLC. This is similar to a corporation's shareholders
- LLCs (like general partnerships) are mostly free to establish any organizational structure agreed on by its members. Profit interests may be separated from voting interests; distribution percentages can be different than the percentage of ownership or investment; etc.
The disadvantages of a LLC include:
- The statutes governing LLCs are fairly new and more untested than corporations.
- Some countries may not recognize your LLC as a valid entity.
- LLC's are treated differently in each state causing some potential tax consequences to members.
Although both S corporations and LLCs offer the benefits of pass-through, thus eliminating double taxation, S corporations have less flexibility than a LLC. For instance:
- A LLC may offer several classes of membership interests while an S corporation may only have one class of stock.
- A LLC can have more than 75 members (the maximum of a S corporation).
- A LLC can be owned by another entity, where as an S corporation must be owned by individuals.
- Non-resident aliens can own a LLC, where as an S corporation cannot.
- A LLC can have a wholly owned subsidiary, where as an S corporation cannot own more than 80% of another corporation.
On the other hand, S corporations can provide a method of reducing self-employment taxes. Owners of an S corporation can separate a portion of the company's net income as W2 wages (to the owners) and the remainder would be taxed as ordinary income, free of self-employment taxes. All of a LLC's net income is generally considered subject to self-employment taxes on both a federal a state tax level.
After your articles of organization are filed with the state, your LLC should have an organizational meeting where an operating agreement is adopted and certificates (representing the interests of the LLC) are issued. Your bank may also require a separate resolution authorizing you (and other members) the authority to open a bank account on behalf of the LLC.
SmallBiZ.com's Deluxe Corporate Kit and Operating Agreement on CD (included in the kit) provide you the information you need to make this process easier.
After you decide to form an LLC, simply fill out and submit our online form. We will then verify your name choices are available, draft your articles, file them with the state and send you all appropriate documents after they have been filed.
Once you have decided on a name, order your corporation online or call us toll-free @ 1-866 2INC NOW or 1-866-246-2669. Once we receive your paid order, we verify your name choices are available, draft your articles, file them with the state and send you all appropriate documents after they have been filed.
Frequently ask question for Corporation
A corporation is a legal entity that exists separately from its owners. Creation of a corporation occurs when properly completed articles of incorporation are filed with correct state authority, and all fees are paid.
All corporations start as "C" corporations and are required to pay income tax on taxable income generated by the corporation. A C corporation becomes a S corporation by completing and filing federal form 2553 with the IRS. An S corporation's net income or loss is "passed-through" to the shareholders and are included to their personal return tax returns. Because income is NOT taxed at the corporate level, there is no double taxation as with C corporations. Subchapter S corporations, as they are also called, are restricted to having fewer than 75 shareholders, who must be individuals (S Corps cannot be owned by other corps) who are not nonresident aliens.
Although you may be done with the process of officially changing the name of the INC with the state, there are still other agencies, vendors, and others who should be notified of the change you have just made.
IRS
Write a letter to the IRS telling them of the INC name change and send it here: IRS-Stop 343G, Cincinnati, OH 45999. For more information about this, go here: http://www.irs.gov/Individuals/Business-Name-Change.
State Agencies
If your business has registered for a sales tax ID, Use Tax ID, occupational license, permits, etc., because it would have been your INC (the owner of the business) that applied for these, you will most likely need to update the record for each. Check with your state taxing body, usually the State Dept. of Revenue.
County & Local Governmental Agencies
If your business has registered for a sales tax ID, Use Tax ID, occupational license, permits, etc., because it would have been your INC (the owner of the business) that applied for these, you will most likely need to update the record for each.
Bank Account
Your bank needs to update its record as well. You will need to take in a copy of the filed articles of amendment showing them the change. A new card with officer signatures maybe required as well. Also, your checks may need to be re-ordered, reflecting the new name.
Registered Agent
Assuming you are not acting as your Corporation’s registered agent, the person or company providing this service, must be notified of the change. Otherwise he/she/they will not know that your company is the same as the newly named INC that it receives notices from the state or legal inquires or lawsuits on its behalf.
Other Vendors
There maybe other vendors that have provided credit or have signed contracts with your INC, which need to be notified of the change.
Yes, there are a lot of formalities to follow when your corporation decides to change its name. However, if you follow a systematic process, as outlined above, your corporation will remain a rock solid veil of protection to its business and assets.
No! Having an attorney is not a legal requirement to incorporate, except in South Carolina (a signature by a SC attorney is required on articles of incorporation). In all other states, you can prepare and file the articles of incorporation yourself; however, you should be thoroughly versed in the laws of your state.
In spite of their seemingly high hourly fees, a good corporate attorney can be a valuable resource to your small biz. If you are unsure of what steps your business should take and you don't have the time to research the mater yourself, even the cost of one hour's consultation can pay off handsomely later. Just remember to bring lots of questions.
Once you have decided, SmallBiZ.com can form your corporation and save you money.
SmallBiZ.com will request your two top name choices. We will check these as part of your order. If neither of these is available, we will contact you for other name choices.
First and most important, we recommend that you spend some time coming up with a name for your corporation. Although each state has different rules concerning the naming of your corporation, the most common rule is that it must not be deceptively similar to another already formed company. The corporate name must include a suffix. Some examples are "Incorporated", "Inc.", "Company", "Corp." However, your state may have different suffix requirements. Check the State Research area to get more details about your state. For more information about naming your corporation read, The Importance of a Good Name.
Even if your corporate name is approved by the state, it does not protect you against infringing upon another's trademark or copyrights. Please consult legal counsel to discuss ways to protect your name and insure that you do not infringe upon another.
The primary advantage of incorporating is to limit your liability to the assets of the corporation only. Usually, shareholders are not liable for the debts or obligations of the corporation. So if your corporation defaults on a loan, unless you haven't personally signed for it, your personal assets won't be in jeopardy. This is not the case with a sole proprietorship or partnership. Corporations also offer many tax advantages that are not available to sole proprietors.
Some other advantages include:
- A corporation's life unlimited and is not dependent upon its members. If an owner dies or wishes to sell their interest the corporation will continue to exist and do business.
- Retirement funds, qualified retirement plans (like 401k) may be set up more easily with a corporation.
- Ownership of a corporation is easily transferable.
- Capital can be raised more easily through the sale of stock.
- A corporation possesses centralized management.
Most every state requires a corporation have registered agent and that agent must have a physical location in the formation state. The registered agent can typically be any person (usually a resident of the state) or any properly registered company who is available during normal business hours to receive official state documents or service of process (law suit).
Most states allow for one person to act as shareholder, director, and all officer roles.
SmallBiZ.com provides a default of 200 shares, although you can choose any amount you want on all orders. The more shares of stock your company is authorized to issue, the more shareholders you can have. For instance, if you were going to have just one shareholder, then 200 shares is more than enough. Your company could issue as few as one or as many as all 200 to the one shareholder. However, if your corporation were to have 10 shareholders, with some shareholders owning as little as 1.25% of the stock, then 200 hundred shares wouldn't work, because there are not enough shares to divide out to 1.25%. So, in many cases, more authorized shares is better. However, some states assess more filing fees or more annual taxes on companies with large amounts of shares.
Your par value is not requested on all orders, and is usually expressed as "No Par Value" or some dollar amount per share such as "$1.00" or "$0.10." Some states require that you do not issue your stock for less than the par value. Some states also base their fees on the number of shares authorized multiplied by the par value.
Your corporation is required to have an Employer Identification Number (EIN) also known as your Federal Tax Identification Number so that the IRS can track payroll and income taxes paid by the corporation. But, like a social security number, an EIN is used for most everything the business does. Your bank will require an EIN to open your corporate bank account.
SmallBiZ.com provides two EIN services: Basic EIN Service - We prepare and email your SS4 (EIN application) & easy one-page instructions for obtaining your EIN. You need only review, sign and fax or call in the information to the IRS to get your EIN; Full EIN Service - We actually obtain your company's EIN for you.
You must have your initial shareholder(s) meeting to elect your director(s), if your director(s) haven't been designated in the articles. Then, you must have your initial organizational meeting of your directors. At this meeting, you will need to elect your officers; adopt your company's bylaws; and issue your stock (among other actions). If you have never done this before, we highly recommend that you purchase our Corporate Forms on CD and our Deluxe Corporate Kit.
Once you have decided on a name, order your corporation online or call us toll-free @ 1-866 2INC NOW or 1-866-246-2669. Once we receive your paid order, we verify your name choices are available, draft your articles, file them with the state and send you all appropriate documents after they have been filed.