Home

The LLC is a relatively new type of hybrid business structure that is now
permissible in most states. It is designed to provide the limited liability
features of a corporation and the tax efficiencies and operational
flexibility of a partnership. Formation is more complex and formal than
that of a general partnership.

The owners are members, and the duration of the LLC is usually
determined when the organization papers are filed. The time limit can
be continued if desired by a vote of the members at the time of
expiration. LLC's must not have more than two of the four
characteristics that define corporations: Limited liability to the extent of
assets; continuity of life; centralization of management; and free
transferability of ownership interests. For these reasons, many people
say the LLC combines the best features of both the partnership and
corporate business structures.

Federal Tax Forms for LLC
Taxed as a partnership in most cases; corporation forms must be
used if there are more than 2 of the 4 corporate characteristics, as
described above.

Commom Questions asked...
How many people do I need to form an LLC?
You can be the sole owner of your LLC (limited liability company) in all
states except Massachusetts, which is expected to allow the formation
of one-person LLCs in the future. Until it does, married business
owners in Massachusetts can form an LLC with their spouse to satisfy
the current two-owner requirement.

Who should form an LLC?
You should consider forming an LLC (limited liability company) if you
are concerned about personal exposure to lawsuits arising from your
business. For example, if you decide to open a store-front business
that deals directly with the public, you may worry that your commercial
liability insurance won't fully protect your personal assets from potential
slip-and-fall lawsuits or claims by your suppliers for unpaid bills.
Running your business as an LLC may help you sleep better, because
it instantly gives you personal protection against these and other
potential claims against your business.

Not all businesses can operate as LLCs, however. Businesses in the
banking, trust and insurance industry, for example, are typically
prohibited from forming LLCs. In addition, some states, including
California, prohibit professionals such as architects, accountants,
doctors and other licensed healthcare workers from forming LLCs.

Must every LLC have an operating agreement?
Although most states' LLC laws don't require a written operating
agreement, you shouldn't consider starting business without one.
Here's why an operating agreement is necessary:

It helps to ensure that courts will respect your personal liability
protection by showing that you have been conscientious about
organizing your LLC.
It sets out rules that govern how profits will be split up, how major
business decisions will be made, and the procedures for handling the
departure and addition of members.
It helps to avert misunderstandings between the owners over finances
and management.
It keeps your LLC from being governed by the default rules in your
state's LLC laws, which might not be to your benefit.

How are LLCs taxed?
Like sole proprietorships (one-owner businesses) and partnerships,
an LLC is not a considered separate from its owners for tax purposes.
This means that the LLC does not generally pay any income taxes
itself; instead, the LLC owners pay taxes on their allocated share of
profits (or deduct their share of business losses) on their personal tax
returns.

LLC owners can instead elect to have their LLC taxed like a
corporation. This may reduce taxes for LLC owners who will regularly
need to retain a significant amount of profits in the company.

How do LLCs operate?
Informally. Unlike corporations, LLCs are allowed to operate without
holding regular ownership and management meetings. You can hold
formal meetings that are documented by written minutes whenever you
wish, but doing so is normally voluntary under state LLC laws. You may
wish to call a meeting only when you want to create a paper trail of an
important LLC decision, such as the admission or expulsion of a
member or the approval of a sizable loan or purchase of real estate.

What are the differences between a limited liability company and a
partnership?
The main difference between an LLC and a partnership is that LLC
owners are not personally liable for the company's debts and liabilities.
This means that creditors of the LLC usually cannot go after the
owners' personal assets to pay off LLC debts. Partners, on the other
hand, do not receive this limited liability protection unless they are
designated "limited" partners in their partnership agreement.

Also, owners of limited liability companies must file formal articles of
organization with their state's LLC filing office, pay a filing fee and
comply with certain other state filing requirements before they open for
business. By contrast, people who form a partnership don't need to file
any formal paperwork and don't have to pay any special fees.

LLCs and partnerships are almost identical when it comes to taxation,
however. In both types of businesses, the owners report business
income or losses on their personal tax returns; the business itself
does not pay tax on this money. In fact, LLC and partnerships file the
same informational tax return with the IRS (Form 1065) and distribute
the same schedules to the business's owners (Schedule K-1, which
lists each owner's share of income).

Can I convert my existing business to an LLC?
Yes. Converting a sole proprietorship or a partnership to an LLC is an
easy way for sole proprietors and partners to protect their personal
assets without changing the way their business income is taxed.

Some states provide a simple form for converting a partnership to an
LLC (often called a "certificate of conversion"). Sole proprietors and
partners in states that don't provide a conversion form must file regular
articles of organization to create an LLC.

In some states, before a partnership can officially convert to an LLC, it
must publish a notice in a local newspaper that the partnership is
being terminated. And in all states, you'll have to transfer all
identification numbers, licenses and permits to the name of your new
LLC, including:

-Federal employer identification number
-State employer identification number
-Sales tax permit
-Business license (or tax registration), and
-Professional licenses or permits.

Do I need to know about securities laws to set up an LLC?
If you'll be the sole owner of your LLC and you don't plan to take
investments from outsiders, your ownership interest in the LLC will not
be considered a "security" and you don't have to concern yourself with
these laws. For co-owned LLCs, however, the answer to this question
is not so clear.

First, let's consider the definition of a "security." A security is an
investment in a profit-making enterprise that is not run by the investor.
Here's another way to think about it: If a person invests in a business
with the expectation of making money from the efforts of others, that
person's investment is generally considered a "security" under federal
and state law. Conversely, when a person will rely on his or her own
efforts to make a profit (that is, he or she will be an active owner of an
LLC), that person's ownership interest in the company will not usually
be treated as a security.

How does this apply to you? Generally, if all of the owners will actively
manage the LLC -- the situation for most small start-up LLCs -- the
LLC ownership interests will not be considered securities. But if one or
more of your co-owners will not work for the company or play an active
role in managing the company -- as may be true for LLCs that accept
investments from friends and family or that are run by a special
management group -- your LLC's ownership interests may be treated
as securities by your state and by the federal Securities and Exchange
Commission (SEC).

If your ownership interests are considered securities, you must get an
exemption from the state and federal securities laws before the initial
owners of your LLC invest their money. If you don't qualify for an
exemption to the securities laws, you must register the sale of your
LLC's ownership interests with the SEC and your state.

Fortunately, smaller LLCs, even those that plan to sell memberships to
passive investors, usually qualify for securities law exemptions. For
example, SEC rules exempt the private sale of securities if all owners
reside in one state and all sales are made within the state; this is
called the "intrastate offering" exemption. Another federal exemption
covers "private offerings." A private offering is an unadvertised sale that
is limited to a small number of people (35 or fewer) or to those who,
because of their net worth or income earning capacity, can reasonably
be expected to be able to take care of themselves in the investment
process. Most states have enacted their own versions of these popular
federal exemptions.

Do I need a lawyer to form an LLC?
No. All states allow business owners to form their own LLC by filing
articles of organization. In most states, the information required for the
articles of organization is non-technical -- it typically includes the name
of the LLC, the location of its principal office, the names and
addresses of the LLC's owners and the name and address of the
LLC's registered agent (a person or company that agrees to accept
legal papers on behalf of the LLC). Santos Associates - Accountants
can help you form your LLC business.

Santos Associates, FEDERALLY AUTHORIZED TAX
PRACTITIONERS, can help you with your accounting, tax
and financial planning needs. Call today for an appointment &
consultation. We are not attorneys, we can refer competent council
upon request.