Wednesday, January 9, 2013

Frequently Asked Questions on LLC Formation

A limited liability company or LLC is technically a new concept in the business world. The United States has only acknowledged this in the late 1970s. So it is expected that many people do not know what an LLC is. Here are the common questions that people ask about the company and LLC formation.

What is a limited liability company?

A limited liability company is a hybrid business structure that features the protection of personal assets of a corporation and tax benefits of a partnership. In this way, the company enjoys a lot of benefits.

What are the requirements in LLC formation?

Only one document is required by law to form an LLC, although some states require other documents. The Articles of Organization is the basic document that states the company's information such as business name, address, names of members and their addresses, name and address of registered agent, and the life of the company. There is a filing fee for Articles of Organization and the fee depends on the state where the business will be established.

What is the business structure of an LLC?

During the LLC formation, the structure of the company will be determined by the owners. One feature of the limited liability company is the flexible management structure. It means that the number of owners (called members) is not limited. The company can have a sole owner, partners, or many members as long as their rights and responsibilities are clearly stated in their documents.

The members can also decide on how the company will be managed. The company can also be run by managers instead of members.

Who can be members?

This is a typical question in LLC formation since the company has flexible management structure. In most of the states, the members are the managers by default but the members can also be owners only and not managers especially if they are not knowledgeable on how the business should be managed.

Since there are no restrictions on ownership, members can be individuals, partnerships, corporations or even another LLC. But this should be verified with the LLC filing office if the state allows such ownership.

How are LLCs taxed?

The federal government classifies limited companies in order to determine how the company will be taxed. Since an LLC enjoys the tax benefits of partnerships, double taxation is prevented unlike in corporations. But there are times when the company files for an election for corporation during or after the LLC formation. In this way, the government will treat the company as a corporation just for the federal income tax purposes.

If the LLC is treated as a sole proprietorship or partnership, the taxation is passed-through. This means that the members of the company will declare the profits or losses of the company in their income tax return. In this way, the company is not taxed at a business level but as income of the owners.

What is a registered agent?

A registered agent should be determined during the LLC formation. This is the designated person to receive legal documents especially for the future lawsuit that involves the company. The name of the registered agent together with his or her address should be included in the Articles of Organization.

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