Limited Liability Company (LLC)

A limited liability company (LLC) is a hybrid, combining the most sought after characteristics of a corporation (credibility and limited liability) with those of a partnership (flexibility and pass-through taxation). Plus, an LLC is not saddled with many of the reporting and documentation formalities that a corporation faces. For example, an LLC does not have to hold regular, annual meetings. These characteristics make it an extremely popular business structure.

Every business owner should consider operating the business in a manner that shields the owner’s personal assets from the liabilities, debts and judgments of the business. The LLC may be preferable for business owners who desire a great deal of flexibility in dividing the profits and losses of the business and in setting the ground rules for how the business operates.

Yes, one of the characteristics that an LLC shares with a corporation is “unlimited duration.” If a sole proprietor or a general partner dies, then the business or partnership ceases to exist. This is not the case with an LLC. The ownership can change hands and the LLC will continue. There are a few states where the death of all members will terminate an LLC, but in most cases the operating agreement can override this default provision. Also, although it can have unlimited duration, the formation documents or the operating agreement can specify when the LLC will terminate, based upon the passage of time or the happening of an event.

Every state now allows for a single-member LLC, which makes it an ideal way for a sole proprietor to protect his or her personal assets. Also, there is no upper limit on how many members an LLC can have—although the larger the number, the more unwieldy operations and governance can become.

To form an LLC, you must file Articles of Formation with the state you selected as your formation state. The Articles of Formation sets forth basic information about the LLC, such as its name, principal address and the name and address of its registered agent. Some states require additional information, such as whether the LLC will be member-managed or manager-managed; others require the names of the initial members. In addition to filing this document, you must also pay the filing fees. Some states, such as New York, also require publication of a notice in a newspaper prior to the formation of the company.

Yes, you must have a registered agent for your LLC. You must appoint your initial registered agent as part of your formation paperwork. If you do business in any states other than your formation state, you will also have to have a registered agent in each of those states. Plus, you must maintain a registered agent in each state until you dissolve the company or withdraw from the state.

No, you do not need an attorney to form your LLC. You can file the paperwork yourself or you can use a professional business formation service, such as CT. However, you may wish to obtain legal advice regarding the provisions of the operating agreement and the tax consequences.

There is no “one best state” to form an LLC. In general, most small businesses opt to form the LLC in the state where the owners reside or where the company is doing business. This cuts down on the initial costs, as well as on-going costs and compliance responsibilities. If you form your company in a state other than the one where you are doing business, you will immediately need to apply for a certificate of authority to operate in that state. And, going forward, you will have to file annual reports (and pay the annual report filing fees) in both the formation state and the state where you are registered to do business. However, if you know that you will be operating in multiple states immediately, or if you plan on utilizing specialized tax or asset protection structures, such as a series LLC, then you may wish to form your company in a business-friendly state, such as Delaware or Nevada. Learn more about the best state in which to form an llc.

There may be tax benefits in forming an LLC, but realizing the maximum benefit will require working with an accountant or other financial professional. By default, an LLC is a “pass-through” tax entity. This means that it does not pay any taxes on company profits and does not realize any benefits from losses and tax items. All these tax attributes are divided among the LLC members based on the operating agreement. While this can reduce income tax, it may increase the amount of employment tax liability owed by a member. All pass-through income is subject to self-employment tax. A tax professional may recommend electing to be taxed as an S corporation in order to reduce this aspect of taxation.

Yes, although an LLC is a disregarded entity for tax purposes, it is very much a separate entity for state law purposes. This means that it can be sued. It also means that the LLC can file lawsuits in its own name, can enter into leases and agreements, open bank accounts and purchase real estate and other property.

Yes, most states permit the conversion from one form of business to another. CT’s business specialists can walk you through the process—which varies based on your current form of business, your formation state and the other states where you are registered to do business.

You can change the legal name of your LLC by filing a Certificate of Name Amendment with your state of formation. (You will need to file a similar certificate in every state where you are currently authorized to do business.) Another option—and one that might not involve filing in multiple states—is to file a “doing business as” (DBA) certificate in the state where you wish to use a different name.

Both an LLC and an S corporation are considered “pass-through” tax entities. That means the company does not pay any tax on its taxable income. Instead, the income, losses, and tax items (such as depreciation deductions) are passed through to the members or shareholders, who report these items on their personal tax returns. One significant difference is that all of the LLC’s profits are considered the self-employment income of the members—and the members are liable for self-employment tax on their shares. In contrast, an S corporation can pay a salary to the owners who operate the business and pay the remainder of the profits to them as dividends. This greatly reduces the amount of employment tax liability and can result in substantial savings. Another difference between an S Corp and LLC is that an LLC can allocate profits, losses, and tax items however the members agree. A corporation must allocate these items based strictly on the number of shares owned.

Unlike an LLC and an S corporation, a C corporation is a separate tax-paying entity. A C corporation reports its own income, expenses, losses, and tax items on its own return and pays taxes based on the corporate tax rate. Any money that a shareholder receives is distributed as salary or dividends. Profits distributed as dividends are actually taxed twice: once as corporate income on the corporation's tax return and, again, as income on the shareholder's tax return. However, there are tax planning strategies—such as accumulating earnings—that are not available to an LLC or an S corporation that may offset concerns regarding “double taxation of dividends.” Talking with a tax advisor can help you sort through the options and determine what is best for your circumstances.

PLLC is the abbreviation for “Professional Limited Liability Company.” In most states, licensed professionals—such as attorneys, doctors, accountants, psychologists, architects or engineers—cannot form a regular limited liability company. In all states but California, these professionals are permitted to form a PLLC. The formation process is similar, but in virtually all states, there are restrictions imposed on who can be members, what name can be used and what must be stated in the formation documents. (In general, forming a PLLC will shield members from ordinary business debts, but will not protect their personal assets from malpractice claims.)