Given below is an explanation of an LLC and related common questions and answers.
What Is a LLC?
An LLC (Limited Liability Company) is a business structure that provides some liability protection in addition to certain tax benefits of partnerships or S corporations. The LLC is bound by the laws of the particular state in which it was created.
If you are a sole proprietor, then you can also convert your small business to a single-owner LLC.
What Are the Pros and Cons of an LLC?
The pros are that your liability is limited only to the amount of capital that you have invested in your company. You can distribute the income earned by any method, as long as it is agreed by all members.
You will also be liable to pay your taxes as an individual, in contrast to the double taxation that you may have to pay if your business was incorporated as a C Corporation.
The cons are that you might have a problem in arranging for capital from the general public, which is quite easy if your business is a C Corporation. Your paperwork will also rise significantly as compared to a sole proprietorship or partnership.
Some states also have a dissolution date clause, in which case your firm might have a limited life – although this clause is slowly being removed from many states.
How Can I Form an LLC?
You will have to first check the official Secretary of State website of your state, where you can download the required forms.
You may have to change the name of your firm, provide the names and addresses of all the members of the company, along with the managers and the registered agent. You will also have to pay the required fees and in some states, even a franchise tax.
If you are converting into a LLC from a sole proprietorship, then some states require the submission of a single form, but in other states, you may also have to file the articles of organization required to form your LLC. But in the case of converting from a partnership, you will have to terminate the partnership first.
You will also need to transfer all your licenses, permits and other identification numbers to your new LLC.
What is the Registered Agent’s Role in an LLC?
A registered agent is a person, which could also be one of its members that can be physically contacted for all legal matters regarding the LLC.
There are also various companies which offer their services as registered agents.
What Separates an LLC From a Partnership?
In a partnership, all the members are personally liable – and you could also end up paying heavily for another partner’s mistake. However, in a LLC you will only be liable up to the amount of your investment in your company.
The members of a LLC will, however, have to file the formal articles of organization with their respective state’s Secretary of State’s office and also pay the applicable fees before they can start doing business. A partnership, however, is exempt from filing any additional paperwork or fees.
So if you feel financially vulnerable in running a sole proprietorship or partnership, then a LLC could be the right solution to your business structure problems.