NigCareers

Meaning of A Limited Liability Company

A limited liability company (LLC) is a business structure in the United States whereby the liability of members is limited to the amount of his contribution as a member of the company. Members or owners as they may be called are not personally liable for the debts or liabilities arising from the company’s business, acts, or omissions. A limited liability company is a hybrid entity that combines the features of a partnership with those of a corporation or sole proprietorship.

The term ‘limited liability’ as contained in the definition means that the company members’ or owners’ assets are protected from being used to settle the liability or debt the company may have incurred. So in the event of lawsuits or debt claims against the company, members of the company cannot be required to contribute to bailing out the company. Creditors can only sue to recover the assets of the company and not the personal assets of members of the company.

Therefore LLC is indeed a type of legal business entity that was developed to simplify the process of business registration and provide business owners with a lower measure of liability.

Types of Limited Liability Company

LLCs have different faces. It can be created in many forms including partnership and corporation. If an LLC involves more than one person in the creation, the LLC is regarded as a partnership for federal tax purposes. The IRS says that this scenario can be changed to traditional corporation taxation if the LLC owners file Form 8832. If on the other hand, only one person is involved in the formation of an LLC, then it is regarded as a separate entity from that individual. For tax, the LLC will apply to taxation as a corporation, sole proprietorship, or partnership; this depends on the kind of LLC you choose.

Features and  steps to forming an LLC

Features of LLC

• The Limited liability Company is registered and administered by state law;
• Members/owners are protected from the debts and liabilities of the LLC;
• Pass-through taxation. The LLC is regarded as a partnership – or, for a sole member LLC, as a sole proprietorship;
• Can choose S status with the Internal Revenue Service;
• Can be   formed by one person or many people;
• Has the freedom to be managed by its members but can be manager-managed as well.

Forming an LLC

Although LLC is generally simple to form there are some administrative documentation necessary to be complied with. We have put together steps to help you form an LLC successfully and fully comply with the state law:

Steps to form a Limited Liability Company

Step 1: Choose the State in Which to Form Your LLC

You have the right to choose any state in the US to form your LLC, even if you choose not to do business there, but it is advisable to choose a state you are likely to do business and in which you a resident. If you decide to form your LLC outside the state you are living in, you will have to register your LLC as a foreign LLC with a likely increase in the formation and administrative costs

You should note that LLC rules vary from state to state about taxation and other costs about business registration. If you conduct relevant research you will find out that some states offer more benefits than others when it comes to LLC formation.

Step 2: Choose a Name for Your LLC

To get your LLC formed, you must pick the name of your company and conduct a name search on the formation state website that the name doesn’t already exist on the Secretary of State’s records. If it does exist, it means that it isn’t available and can’t be used. When a name is not available it means that another domestic or qualified LLC business entity has adopted the name and two LLCs cannot use the same name. This means that you must look for a substitute name and similarly conduct another name research to make sure that the name is available before you can proceed to the next step.

If your desired name is available, but you decide to defer filing your formation documents, you must inform the state department to reserve the name for you. They will oblige you provided that you are ready to pay a token for the length of time but it must be for a short time indeed.

You may decide to kill two birds with one stone and conduct another important search, this time “trademark” of the name you would like to avoid to prevent legal issues in the future when you become entangled with intellectual property violations as well as having to confuse your customers.

Step 3: Appoint a Registered Agent

It is always advisable when forming an LLC whether locally or in another state (foreign) to have a registered agent who will be on the ground to receive emails about the LLC formation. The registered agent, also known as an agent for service of process primary duty is to receive pertinent legal notices and tax documents sent by the Secretary of State or the state’s department of taxation on behalf of the LLC.

The registered agent is also on hand to receive service of process, also known as Notice of Litigation, which is a legal document of summoning, giving notice that a lawsuit is in the offing against the LLC. The registered Agent represents the LLC in this way; also other court documents like a garnishee order or subpoena are channeled to the registered agent.

It cannot be emphasized the importance of the registered agent service provider hired to handle these important documents. The point is that at this stage of the LLC formation, no one has a registered address to receive and attend to these documents, even the sole owner may not be there to attend to the mails or the summons. So the best alternative is to appoint a registered agent, though a fee is paid the problem the LLC will be entangled with if any of the documents sent by the Secretary of State or the State Department of Taxation is missing or mishandled is better imagined.

Because of the important role the registered agent is required to play in the LLC registration exercise, there must be a physical address where documents can be sent; a post office box (PO Box) is unacceptable.

Step 4. Payment of registration fees

The one-time fees required to register your LLC will certainly depend on the state you want to register your LLC. It can range from $200 in some states to $1,000 in other states. Conduct online on the relevant website to be sure of the correct figure.

Step 5. Publish a notice of intent to create an LLC

Some states will require you to publish a legal notice in your local newspapers. This is a requirement only in some states. Your state may require that you publish a legal notice in a local newspaper declaring your intent to form an LLC. If you are unfamiliar with the wordings of the notice, the newspapers will be able to help you in creating this notice. This notice may be required to be published over many weeks or months as required by the state. After the publication, you will be required to submit an affidavit to the state as evidence of publication.

Step 6: Prepare an LLC Operating Agreement

An LLC operating agreement is required in the registration of the LLC exercise. An operating agreement is an internal agreement among all the members and between the LLC and the member or members as to how the business of the LLC is to be conducted. Some states allow oral agreement but it is highly recommended to have a written agreement to avoid future disagreement among members. Even in situations, it is a lone member, it is advisable to have an operating agreement as an indication there is a clear separation between the owner and the LLC particularly to prevent the rear cases of piercing the veil. It allows you to write down what you will like to happen in some situations in the future like if you choose not to continue with your business, an exit route to opt-out of some default provisions of the LLC statute that you may want the LLC to be excluded from.

Some LLCs are multi-member owned and therefore there is a great need for a well-drafted operating agreement to be in place. The document will set out some of the areas of disagreement and prevent avoidable future disputes. In particular, the document will spell out the following:

The ownership interests

Division of labor among members

How profit or loss is to be shared.

Circumstances for the transfer of ownership interests

Votes required approving certain transactions.

How new members will be admitted

To be sure all areas are covered; it is a good idea to get the attorney to review the operating agreement before being filed or submitted.

Step 7: File Your Articles of Organization  with the State

The LLC Article of Organization, Certificate of Formation, or Certificate of Organization is one of the important formation documents that are similar in some respects in all the American states. The areas it is common to include the following:

LLC name, objects for which the business is being formed, and the principal place of business.

The name of the registered agent and the physical address

Who manages the LLC – manager-managed or member-managed?

In every state, there are standard forms for the articles of organization that can be picked whenever needed. The necessary documents are going to be signed by whoever formed the LLC but maybe someone else outside the manager or a member. Some states make it mandatory that the registered agent’s consent to act must be obtained before assuming duty.

Once all the documents are complete and an application for LLC filed, it is a question of time, the state will issue an LLC certificate or any other form of confirmation that the LLC has been approved. With this confirmation by the state, a business bank account can be opened and an EIN obtained.

Step 8: Obtain an EIN

Once the business entity has been established, you must file an application to the Internal Revenue Service (IRS) for an employer identification number (EIN). The LLC will use the EIN for income and employment tax filings as well as its bank accounts. You must also make sure that you apply to the state’s tax department where you plan to be doing business for sales tax identification number and also register with the state’s labor department.

Step 9: Open a Business Bank Account

At this stage, you can open an account with the bank. This action is essential to separate the business from your account. Though it is not a legal requirement it makes sense since it is one of the important factors courts take into account when considering whether to pierce an LLC’s veil. Piercing the LLC veil means removing the LLC corporate veil to discover which member/s to hold responsible for the LLC’s debts. The banks usually would require company details before opening a business account such as member’s names and addresses, formation date, business type, etc.

Step 10: Register to Do Business in the Other States

If you plan the LLC just formed to do business in other states outside the formation state, you must register it for such purposes. It only requires filing an application for authority with the Secretary of State. This application is often accompanied by a Certificate of Good standing.

If you are going to carry out business in a particular state (foreign qualify), some factors are usually used to determine if that is the case. Such criteria may include the following:

Whether the LLC has a physical presence in the state

Whether the company has employees and accepts orders in the state

However, all the states don’t apply the same criteria and to find out if your LLC requires foreign qualify in a particular state, consult an attorney.

Limited Liability Company – Merits and Demerits

Limited Liability Company is a business entity with limited liability for its members/owners and operates under state laws. Those who form LLC are referred to as its members or owners. They can manage the company the way they think fit, unlike a corporation where ownership is devoiced from management. The reason for this scenario is simple. Corporations raise capital by public subscription and it is not right to allow those who form it to manage it because it is likely they will mismanage the funds of the corporation. But in the case of LLC, the capital is raised by the members/owners. So it is up to them to manage the business the way they choose.

Merits of a Limited Liability Company

Limited Liability

An LLC is formed as a separate legal entity different from those that formed it. It protects its members from being personally liable for acts and omissions committed by the company. This means that if the company commits acts of trespass or is being sued by a creditor whose debts have long fallen due, the individual members are not affected and cannot be held responsible, rather the company. The personal assets of the individual members such as cash in the bank, personal cars, landed property, etc. are safe. The only situation in which the members can be liable is when the company commits an act that is beyond the object for which it was formed, the court will pierce the corporate veil to pull out the member responsible for such an act. This means that the court will remove the limited liability clause and fish out the member that has committed or aided and abetted the commission of the act.

Tax Advantage

The law treats the income arising in the course of the ordinary business of LLC as the income of members or owners, just like the partnership. So when an LLC earns income, this income is distributed to members and they pay tax on that basis as it is their income. The same logic plays out in partnership but not for a corporation. Members of the LLC avoid the payment of double taxation. Double taxations occur when the taxpayer is assumed to pay tax twice. For instance, when a corporation receives income, it pays tax on the income before the profit is distributed to members in the form of a dividend. But after members receive their income from the corporation, they will be required to pay tax on the same income which is now their income. This is called double taxation.

The flexibility of Income Distribution

An LLC distribution of the profits of the business is more flexible than the corporation. The earnings of an LLC don’t have to be distributed equally or according to the member’s capital contribution. There is more flexibility in the distribution of profit in an LLC. For instance, a member who takes an active part in running the LLC should be compensated in the way of a bigger share of the profit than members who are just dormant partners. So with this explanation, they are free to distribute the profit in whatever way they think appropriate. However, whichever way the profit is shared, the sharing formula must comply with the Internal Revenue Service’s rules on partnership income distribution.

Simplicity

Another sound benefit of forming a Limited Liability Company is the relative ease at which it can be formed and managed. Whereas forming a corporation lake a long process with the publicity, extra cost and additional information make the process very long and cumbersome. In the case of LLC, the law only requires members/owners to file the Article of Organization and drafting the Operating Agreement which lays down the company’s rules and operating procedures (rights and responsibilities of members).

Whereas corporations have additional responsibilities to hold statutory meetings, have the affairs of the corporation regularly publicized, and take a record of meeting procedures, etc. these requirements do not apply in an LLC.

Member Controlled

In LLC ownership is not devoiced from management whereas, in a corporation, founders of the corporation are not allowed to manage its affairs. The LLC has the flexibility to manage the business the way they think fit. The requirements of appointing the CEO and the Board of Directors don’t apply. The members of LLC can take part in the management of the company.

Disadvantages of a Limited Liability Company

Difficult to Raise Capital

A limited liability company generally doesn’t find it easy to raise capital even though they share the same two sources of raising funds as a corporation: equity and debt. The problem is that the LLC cannot offer its shares for a public subscription but may try to invite potential investors privately, and this can be a long process and eventually might not work out.

Another method is the debt issue which a corporation can and invites members of the public to subscribe to its debenture and can easily raise the capital. But the LLC is not allowed to publicly invite people to subscribe to its debentures. They will have to engage in long and expensive negotiations with the bankers to obtain the required loan.

Dodging this route requires members to go and look for the required funds themselves or search for investors, which might even present more difficulty. Limited liability companies are not big and might not be well known so convincing potential investors to invest in your business will pose a big challenge.

Confusion Across States

LLC generally operates under state laws because they are registered under a particular state. This may post a serious challenge when you want to do business across states. Since state laws across the US differ, it becomes a bit complex to understand and adhere to different requirements of multiple states. Therefore, an interstate business shouldn’t go well with the LLC business organization.

No Perpetual Succession

One of the biggest challenges of LLC is the absence of perpetual succession. This means that in the event of a member’s withdrawal from the company either by death, incapacitation, or personal choice, the business comes to an end. A new company may have to be floated, even in a situation, it is the sole member.

But the coming to an end of the LLC perpetual existence when a member leaves can be circumvented by transferring the ownership stake of the departing partner. Even with this, heavy restrictions are making it an unenviable option.

Starting a Business