LIMITED LIABILITY COMPANY (LLC)

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Limited Liability Company (LLC)

10 Steps to Forming an L.L.C.
 
 
There are 10 steps to Limited Liability Company (L.L.C.) formation that must be followed.  These are outlined below.   
 
  1. Choose the State in which to Form the L.L.C.
    1. It is of little advantage to form a Limited Liability Company in a state in which you do not transact business.  If you form a Limited Liability Company in Delaware but operate your business in Florida, you will end up paying more.  The cost to form a Delaware Limited Liability Company with the help of a service organization would be over $250.00.  Florida would consider the Delaware L.L.C. a foreign corporation and require that it pay an additional fee in order to qualify to do business in Florida. 
    2. You gain the biggest advantage when you form your Limited Liability Company in the state in which you intend to do business.
  2. Select a Limited Liability Company name.
    1. The second order of business is deciding upon a name.  This name must not be in use by another company in the state.  It cannot be so similar to another company that it may cause confusion or mislead the general public in any way.
    2. A name search with the secretary of state or its equivalent division will determine if the proposed name is available.  For a small fee, most states will hold a name rese4rvation for up to 120 days to allow time to file for incorporation.  The words "Limited Liability Company" or "Limited Company" or the abbreviations "L.L.C." or "L.C." must follow the selected name.
    3. Many entrepreneurs use their family name or initials when choosing a company name.  This choice may cause problems or early setbacks.  If you add descriptive words, there is generally a greater chance of acceptance. 
    4. Certain words such as "Bank," "Trust," "Doctor," and "Mortgage" should be avoided because they usually require special approval.  In general, the approval process is a lengthy process and there is a high probability of rejection on the first try.
  3. Determine the L.L.C. Address
    1. The L.L.C. address may be a home address or a Post Office box.  Many entrepreneurs use the services of companies that rent private post office boxes to ensure privacy and to keep their personal and business correspondence separate.
    2. It makes good business sense to choose the address that will be the most convenient to use.
  4. Decide on the Members
    1. Members are the individuals who own the company and who set policy.  The number of members required varies from state to state, with some states permitting only one member.  In order to receive Federal Partnership pass-through tax treatment, the L.L.C. should have at least two (2) members at all times.
    2. Be prepared to provide members' names, addresses, terms of initial appointments, and capital contributions in your Operating Agreement and to state regulating authorities.
  5. Declare the Type of L.L.C.
    1. Many states allow L.L.C. members to choose whether they want to be structured as a corporation or a partnership for tax purposes.  If you choose the partnership structure, you will be able to be eligible to benefit from the pass-through tax status.
  6. Designate the Organizer
    1. Each state requires someone to file the documents necessary for the organization and formation of the Limited Liability Company.  In most states only one person, called the organizer, is necessary to perform this function.
    2. Filing can be accomplished by an attorney, someone close to the Limited Liability Company such as a member or manager or an employee of a service company who specializes in this type of work.
  7. Prepare the Articles of Organization
    1. In order for form a Limited Liability Company in any state, a document called Articles of Organization, sometimes referred to as a Certificate of Formation, must be written and filed.  Many states have simple forms that take very little time to complete.
    2. Although specific formation requirements vary from state to state, the Articles of Organizations should always be a clear, concise charter of the Limited Liability Company.  Minimally, the document normally contains the Limited Liability Company's name and address, the registered agent's name and address within the state - often called the "registered office" - the members' and managers' names and addresses, and any limiting provisions.
    3. It is critical that your L.L.C. have more than one member and be organized in such a way that the IRS won't consider it a corporation for tax purposes in order for your Articles of Organization to pass the IRS guidelines.  Passing these guidelines qualifies your L.L.C. for Federal Partnership pass-through tax treatment.
    4. Your Limited Liability Company must also exhibit certain characteristics.  These characteristics must be clearly documented in your Articles of Organization in order to eliminate potential IRS problems.
    5. Once the Articles of Organization has been prepared, the organizer(s) files it with the Secretary of State.  All necessary filing fees must be paid at this time.
    6. If the company name was correctly reserved and the Articles of Organization properly filled out, you should be notified soon afterward that your Limited Liability Company has been accepted by the state and is ready to do business.  Do not order supplies or stationery until you have been formally notified that your Limited Liability Company filing has been approved.  If you are notified that something is wrong with your filing simply correct the problem and refile.
  8. Conduct an Organizational Meeting
    1. The first meeting of the company members, called the organizational meeting, should be held as soon as possible after the secretary of state approves the Articles of Organization.  At this time, company members determine the Operating Agreement, elect managers and, if necessary, address any business that needs immediate attention.
  9. Draft an Operating Agreement
    1. Most state L.L.C. legislations have rules prescribing how Limited Liability Companies should be operated.  Individuals should obtain a copy of their state's L.L.C. legislation before forming an L.L.C. in order to determine what can and cannot be included in the Operating Agreement.
    2. The Operating Agreement established at the organizational meeting should:
      1. Approve the Articles of Organization
      2. Determine the number of members, method of elections, and grounds for termination.
      3. Establish the method of choosing managers and their terms, duties, and salaries.
      4. Clarify times and places for members' meeting, as well as provisions for calling meetings.
      5. Finalize the principal business address.
      6. Establish banking procedures and accounts.
      7. Review procedures for capital contributions and transfers, as well as record keeping.
      8. Outline the authority to change the Operating Agreement as necessary.
  10. Apply for Taxpayer Identification
    1. Once you have formed your L.L.C., it is time to apply for a taxpayer identification number.  This is done by completing Form SS-4, the employer tax identification number application which can be obtained directly from the IRS.  Complete this form and mail it to the same IRS center that will receive the company's Federal Income Tax Returns.  You can also obtain your identification number quickly over the telephone by calling 800-829-1040.  Be sure to have your completed Form SS-4 in front of you when you place this call.
  11. (Optional)  Ordering the L.L.C. Kit
    1. Once the Limited Liability Company has been approved, the organizational meeting has been held, and the Operating Agreement has been finalized, the company is almost ready to conduct business.
    2. At this point the member may order or buy a Limited Liability Kit.  These are available through CAI, Inc. or from stationery stores, business supply outlets, or professional business organizations.  These kits include the following items:
      1. Limited Liability Company Seal
        1. The L.L.C. seal is a small hand-held press into which a document is placed to be embossed.  The imprint made by the seal includes the company name, state of formation, and the founding date.  These seals were once mandatory for corporations, but are now optional in some states.
        2. This seal lends an air of authority to Limited Liability Company documents and is worth having even if the particular state of your L.L.C. does not require it.
      2. Membership Certificate
        1. A Membership Certificate is a printed certificate used as evidence to show who owns how much of the Limited Liability Company.  Most L.L.C. kits contain 10 to 20 blank membership certificates which may be issued as the company sees fit.
        2. Membership Certificates are normally accompanied by a membership register which lists the certificates and their current owner(s).
      3. Sample Operating Agreement
        1. To help guide first-time Limited Liability Company owners, most L.L.C. kits contain a sample Operating Agreement to use as a guide or reference on how and why to keep proper records. 

Requirements to be Taxed Like a Partnership

The law states that an L.L.C. can be taxed like a partnership provided it does not have more than two (2) of the following characteristics of a corporation.

  1. Central Management
    1. This can be avoided if the business is managed by the owners, rather than by elected managers.
  2. Continuity of Life
    1. The L.L.C. is usually dissolved by the death, retirement or withdrawal of a member.  Provisions for continuation, if a majority of the remaining members agree, is permitted.
  3. Free Transferability of Interests
    1. The statute generally provides for transfer of an interest only with consent of a majority of the non-transferring members.
  4. Limited Liability
    1. This is the one corporate characteristic which is always desired.

L.L.C.'s are created by statute and vary from state to state.  The operating agreement sets forth the relationship of its members (owners) and governs how the L.L.C. will be operated, allocation of earnings, capital contributions and distributions.  The formalities found in the corporate business organization, like directors meetings, written minutes, etc. are not required.  The Limited Liability Company is for tax purposes a "pass-through" entity like a partnership or S Corporation but gives the Limited Liability of a corporation.