Until a few years ago, the only legal entity choice for a business was to incorporate or not to incorporate. However, in recent years, all 50 states have adopted some form of the limited liability company, or LLC, offering an attractive alternative that experts believe every business, even the smallest home-based business, should consider.
If you planning to start a business and are checking out the different types of legal entities, or if you are looking for an alternative to the more common structures, then you may want to look into forming a different type of business entity called the limited liability company. All 50 states have recently adopted some type of LLC laws and experts say that no matter the size of the company, it is something worth considering.
This business structure combines the best aspects of incorporation with the tax advantages of partnership, without the red tape of either. Experts have said that anyone starting a new business must separate their personal life and assets from their business ventures, in order to avoid any personal liability. A limited liability company is personal protection in its purest form. As a business owner, you need to avail yourself of any and all laws that are designed to provide any type of protection. Whatever form of business structure is selected, whether corporation, partnership, LLC, etc., it needs to be well thought out and put in place at the beginning.
For most companies, if changes are warranted, then it can be quite difficult to do any type of modification. Due to its simplicity, the limited liability company does not require ongoing high maintenance and it is easily modified if any changes are needed.
Most states do require an LLC business to have an Operating Agreement of some sort between the owners/members, with regard to how it will be operated. It covers many different areas of operation, including management, distribution of profits and losses, termination, admission of new members and any special allocations. It also contains certain things that qualify it for the quite beneficial partnership tax agreement. If the document is not drawn up correctly, then of course the LLC will not qualify and will be taxed as a corporation. The individual state statutes are classified as “flexible” or “bulletproof.” A bulletproof statute requires that the operating agreement have certain provisions that will allow them to qualify for partnership taxation. Flexible statutes allow the drafting of the Operating Agreement up to the individual organizers. Although not all states have adopted it, there is a process called “Check the Box,” wherein the LLC organizer can just elect what tax treatment is preferred. If you are unsure as to whether or not this is an allowable option for you, then the safest way to organize is to comply with the original guidelines of the corporate characteristics.
Most states only require filing a single form, called the Articles of Organization, and then an annual report updating any information. There are fees for this and it varies from state to state. The actual paperwork involved in forming the limited liability company is quite simple. As long as it is a legally formed entity, the “freedom of contract” standard lets members/owners of an LLC business run the company in any way they see fit, making it a very attractive alternative to many of the other business structures.
The simplicity involved when forming a LLC is one of the advantages that attracts business owners, and another is the “freedom of contract” principle, which allows the owners/members of the limited liability company to form and run the company in any way they see fit. The actual paperwork is fairly simple as well. Most states only request filing two forms, one is the Articles of Organization and the other is an annual report that updates basic information to the state. There are filing fees required for these forms, but the amount varies from state to state.
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