Limited Liability Company: The Basics
Limited Liability Company: The Basics
A limited liability company, or LLC, is just what the name says: a company. Note that this is word is not synonymous with "corporation"; a corporation is a different type of structure, though both business types are considered distinct legal entities and have important tax responsibilities. In many respects, the structure of a limited liability company is more flexible than a corporation. Below is an explanation of a few of the main aspects of an LLC.
Articles of Organization
Articles of Organization are an LLC's version of a corporation's Articles of Incorporation -- they are the formation document for your limited liability company. They provide both the Secretary of State and the public with important information about your business.
The name you select for your LLC must be available for use in the state, which means there must not be another limited liability company or corporation with that same name. Corporate endings or entity types typically are not a factor in determining name availability; for instance, if you wished to name your limited liability company Jones's Automotive, LLC, you would not be able to do so if there is a Jones's Automotive Corporation or Jones's Automotive, Inc. already registered with the state.
While each state has a slightly different form for the Articles of Organization, the typical information included is as follows:
The name of your LLC
Registered agent
Registered office address
Principle office address
Business purpose statement
Organizer
The minimum required information does vary from state to state. Additionally, the state-required minimum may not meet all the requirements of other government entities your LLC may deal with, so you may wish to add certain clauses during the formation process.
Operating Agreement
If the Articles of Organization are to record information about your business for others, the LLC Operating Agreement is to record information about your business for yourself. The Operating Agreement is like a blueprint for how the company should operate, and it should include information about financial documents, contingency plans, transaction procedures -- essentially, it details the day-to-day workings of your limited liability company.
A list of sections of a typical Operating Agreement might look like this:
Definitions
Formation
Capital Contributions
Allocation of Profits and Losses
Distributions
Management
Records
Transfer of Membership Interests
Dissolution; Continuation
Meeting of Members; Voting
Amendments
Miscellaneous
Structure
A limited liability company is known as a pass-through entity; the owners of an LLC (called Members) report gains and losses on their own personal income tax returns. This provides important tax benefits; other entity types may be subject to "double taxation," meaning that profits are subject to a corporate income tax, and then the owners must pay taxes on their income from the corporation as well.
The owners of an LLC are able to agree on any profit distribution structure they wish, regardless of the member's capital contribution. In other words, if one owner has contributed more financially to the company than the other, they could still agree to split the profits 50/50. (Compare this with an S corporation, where the percentage of profits must match the percentage of contributions.)
On the negative side, depending on the tax classification of your LLC, you may be responsible for paying a 15.3 percent self-employment tax. This percent would be taken from the net income, not just the individual owners' salaries, as in an S corporation.
As you can see even from these brief examples, a limited liability company has costs and benefits in comparison to other entity types. The facts of each individual business situation should be considered when making the decision of whether or not to form an LLC.
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