For business flexibility purposes, many individuals choose to establish a limited liability company or LLC. This option is desirable for people that prize what a sole proprietorship has to offer, individuality, as well as the legal protection an LLC affords. Your business attorney can explain the finer points of establishing an LLC and help set one up in your state.
A limited liability company is a legal business structure that is recognized in all 50 states and the District of Columbia. When it comes to paying taxes, it offers a pass through capability, allowing its owners to file taxes as a sole proprietorship or a partnership. Like a corporation, an LLC limits the personal liability of its owners. If a legal matter does arise, a plaintiff can go after an LLC’s assets, but not its owner’s personal assets.
The first LLCs established in the United States were in Wyoming beginning in 1977. Notably, the Wyoming act permitting an LLC was modeled on one used in Germany. Uncertainty on how the IRS would treat LLCs slowed the advance of this business arrangement though the 1980s. However, as the IRS clarified its rules, by the 1990s LLCs were established nationwide.
In some states, there are variations on the LLC theme. For instance, you may see the term PLLC used to describe a Professional Limited Liability Company. Such enterprises are reserved for individuals and businesses that provide professional services such a doctor, an accountant or an attorney. How PLLCs are handled, if at all, is always determined at the state level.
One of the most significant reasons for establishing an LLC has to do entirely with personal liability. Accounts opened in the business name belong to the LLC and therefore cannot be assigned to the individual members. That means loans, credit cards and other business debts owed are the liability of the LLC, not the individuals.
An LLC can determine how profits are divided. For instance, if there are five owners, 40 percent of the profits might go to one individual, 30 percent to a second owner, 20 percent to a third owner and 5 percent each to the fourth and fifth owners. This ratio is determined by the LLC and is agreed upon by its owners.
Corporations must conduct business meetings and keep formal record through minutes and published resolutions. The LLC has no such requirement, although meetings and other formal gatherings may still be held.
An LLC is only in affect as long as its members remain alive. A one-person LLC is automatically dissolved on the death of its sole member. An LLC with two or more members must spell out what happens to the business if one member passes away. If the LLC files for bankruptcy, it will automatically dissolve too.
Putting an LLC together requires that its members take steps that a sole proprietor would not take. For instance, an LLC must file "articles of incorporation" with the state. A related filing fee must be paid and annual reports issued. Once the necessary paperwork has been issued, the state may issue a "certificate of organization" to the LLC. Separately, some states also require LLCs to maintain an operating agreement, something your attorney may recommend even if one is not required.
Now back to the IRS. Although recognized by the individual states, the IRS has chosen to ignore LLCs, looking at them as a corporation, a partnership or as a "disregarded entity" on the individual’s tax return. An LLC with two or more members is treated as a partnership for tax purposes unless its members file IRS Form 8832 to have it treated as a corporation. Although the IRS looks at LLCs differently than the individual states, it still expects that the applicable and appropriate taxes be paid. Check with your attorney on how best to handle your LLC.
Frank Roberts writes for Swope, Rodante P.A., a Tampa law firm specializing in cases involving traumatic brain injury, wrongful death, automobile collision, and catastrophic injury.