Monday, December 31, 2012

What is a limited liability corporation

What is a limited liability corporation?

A limited liability corporation is just another name for a limited liability company. A limited liability company, which is also called an LLC, is a business499058_f260 structure that combines the pass through taxation of a partnership or sole proprietorship with the limited liability of a corporation.

Like the owners of a partnership or sole proprietorships the LLC owners have to report their business profits or losses on their personal income tax returns because the LLC is not a separate taxable entity. But unlike these owners if you own an LLC you are not personally responsible for the business debts and claims, you are protected from any personal liability unless you have given a personal guarantee, this is what is known as limited liability. Basically what this boils down to is that if somebody sues the LLC then only the assets of the business itself are at risk, your personal assets are considered safe. But what you want to keep in mind is that you can lose this protection of your assets if you act illegally, unethically, or irresponsibly.

But it is because of these features that many people say that a limited liability company is nothing more than a hybrid business structure that takes the best features of a partnership and a corporate business structure. Meaning this business structure combines these two forms of business, but only uses the best features from each form.

How many people do I need to form an LLC?

Many people wonder how many people you need to form a LLC because of the fact that it combines various business structures. The good news is that you only need one person to form an LLC and you can form an LLC in any state. But you can also have more than one owner when forming an LLC.

Who should form an LLC?

If you are concerned about personal exposure to lawsuits or debts arising from your business than you should seriously think about forming an LLC. A great example of this would be if you were opening up a store front business that deals directly with the public you might be worried about your commercial liability insurance not fully protecting your assets from customers suing you from slipping and falling or something else. So by forming an LLC your personal assets are protected from these types of claims and any others.

But something that you want to keep in mind before you decide to form an LLC is that not all business can operate as an LLC. Businesses that are in the banking, trust and insurance industry are generally prohibited from forming LLC?s in every state. Also in some states, including CA, there is a rule that prohibits professionals, such as accountants, doctors, architects and other professionals from forming an LLC. So if you are considered to be some kind of professional you want to check into your state laws to see if you can form an LLC or not.

How do you form an LLC?499055_f260

This is going to vary depending on which state that you live, but for the most part this is a pretty universal process. All that you really need to do is to file an ?Articles of Organization? with your state?s LLC filing office. In most states this filing office is going to be a part of the Secretary of State?s Office. But in addition to filing the ?Articles of Organization? you are going to have to pay a filing fee. Keep in mind that some states refer to these forms as a ?Certificate of Organization? or a ?Certificate of Formation?. But no matter what it is referred to most states will provide a fill in the blank form for you to use and these only take a few minutes to prepare. You can get this form by mail or by downloading it from your state?s website, in the Secretary of State or corporation?s home page.

Some states will also require you to publish your intention to form an LLC in your local newspaper. The states that require this also require that you complete this step before you file your Articles of Organization. Some states, but not very many, will also require you to prepare an LLC Operating Agreement. And even if it is not required in your state it is still a good idea to prepare one. The reason that you want to do this regardless of your state requirements is because your Operating Agreement is going to spell out your business arrangements and it will also decide how your LLC is run. If you fail to create a written Operating Agreement then the LLC laws of your state will dictate how your LLC is run.

Do I need a lawyer to form an LLC?

The good news is that you do not need to have a lawyer to form an LLC, but if you want to use one you can. The reason that you don?t need to hire a lawyer is that the information that is required for the Articles of Organization is all non-technical information so it is easy enough for you to fill out on your own. Basically what the Articles of Organization include are the name of the LLC, the location of its main office, the names and addresses of the owners, and the name and address of the LLC?s registered agent. The registered agent is a person or company who agrees to accept legal papers on behalf of the LLC. Not to mention that since most states now provide downloadable forms and instructions the process to file for an LLC is even easier and the LLC offices even allow business owners to email them questions directly.

Does my LLC need an operating agreement?499057_f260

This is not required by all states, but it is something that you should do if you plan on starting a business. Here are the main reasons why an operating agreement is necessary:

  • Ensures that the courts will respect your personal liability protection because you are showing them that you have been conscientious about organizing your LLC
  • Helps to avoid misunderstandings among the owners over finances and management
  • Sets out the rules that govern how the profits will be split up, how major business decisions will be made, and the procedures for handling the departure and addition of members
  • Allows you to create your own operating rules rather than being governed by the default laws in your state. Which these state laws might not work to your benefit

How are LLCs taxed?

LLCs are not considered a separate entity from its owners for tax purposes. So this means that an LLC does not pay any income taxes itself. Instead what happens is that the owners of the LLC pay taxes on their allocated share of profits or they get to deduct their share of business losses on their personal tax returns. But the thing with an LLC is that you can choose how you want it to be taxed, so you can also choose to have your LLC taxed like a corporation. This can be useful because it can reduce taxes for LLC owners who need to retain a large amount of profits in the company.

Can I convert my existing business to an LLC?

The good news is that yes you can convert your business to an LLC. In fact converting a sole proprietorship or a partnership is an easy way for the business owners to protect their personal assets without changing the way that their business income is taxed. And some states even provide a simple form for converting a partnership to an LLC; this form is usually called a ?Certificate of Conversion?. If your state does not provide this form then you will need to file regular Articles of Organization to create an LLC.

And just like in forming an LLC some states require a partnership to publish a notice in the local newspaper that the partnership is being terminated before the partnership can officially convert to an LLC. But no matter what state you live in you are going to have to transfer all identification numbers, licenses, and permits to the name of your new LLC. Some other things that you will need to transfer over are:

  • Federal identification number
  • State employer identification number
  • Sales tax permit
  • Business license or tax registration
  • Any professional licenses or permits

What are the differences between a limited liability company and a partnership?499054_f260

The biggest difference between an LLC and a partnership is that in an LLC the owners are not personally liable for the company?s debts and liabilities. What this boils down to is that creditors cannot go after the owners? personal assets to pay off the businesses? debts. And the only way that this can happen in a partnership is if the partner is designated as a ?limited? partner in the partnership agreement. Another big difference is that when you are forming a partnership you do not need to file any formal paperwork or pay any special fees.

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Source: http://themodernaccountant.com/2012/12/30/what-is-a-limited-liability-corporation/

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