FEATURES OF AN LLC IN THE US

FEATURES OF AN LLC IN THE US FEATURES OF AN LLC IN THE US A OVERVIEW Definition I Limited liability company, commonly called an “LLC”, is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation II a) Characteristic Features A Limited Liability Company (LLC) is a hybrid business entity having certain characteristics of both a corporation and a partnership or sole proprietorship (depending on how many owners there are) An LLC, although a business entity, is a type of unincorporated association and is not a corporation The primary characteristic an LLC shares with a corporation is limited liability, and the primary characteristic it shares with a partnership is the availability of passthrough income taxation It is often more flexible than a corporation, and it is well-suited for companies with a single owner (we’ve mention abt owner So what is owner?) b) Owner Owners of an LLC are called members Most states not restrict ownership, and so members may include individuals, corporations, other LLCs and foreign Yen Phuong – Bich Ngoc – Tuong Van FEATURES OF AN LLC IN THE US entities There is no maximum number of members Most states also permit “single-member” LLCs, those having only one owner There are two types of LLC memberships, depending on the number of members – a single-member LLC, and a multiple-member LLC There is no difference between a single-member LLC and a multiple-member LLC in how they run the business, but there a difference in how they are taxed  Who Can Be a Member of an LLC? The states don't impose many restrictions on LLC membership, except that members must be 18 or over They don't have to be US citizens If the LLC is organized as a Professional LLC, all of the members must be licensed professionals of the same profession Each state designates which types of professionals can form a LLC Some states require that the members of an LLC be identified, while other states not have this requirement If the LLC is a Professional LLC, the members usually must be identified and their professional licenses must be examined and approved when the company is formed  Do Members Manage the LLC? The members can choose to manage the LLC themselves, or they can designate or hire a manager or managers The management of the LLC is usually spelled out in the application with the state and also in the LLC operating agreement If the members decide to manage the LLC themselves, they can set up the management any way they like There is no formal board of directors structure required c) Legal liability Yen Phuong – Bich Ngoc – Tuong Van FEATURES OF AN LLC IN THE US  Limited Personal Liability Like shareholders of a corporation, all LLC owners are protected from personal liability for business debts and claims This means that if the business itself can't pay a creditor such as a supplier, a lender, or a landlord the creditor cannot legally come after an LLC member's house, car, or other personal possessions Because only LLC assets are used to pay off business debts, LLC owners stand to lose only the money that they've invested in the LLC This feature is often called "limited liability."  Exceptions to Limited Liability While LLC owners enjoy limited personal liability for many of their business transactions, this protection is not absolute This drawback is not unique to LLCs, however the same exceptions apply to corporations An LLC owner can be held personally liable if he or she: • Personally and directly injures someone • Personally guarantees a bank loan or a business debt on which the LLC defaults • Fails to deposit taxes withheld from employees' wages • Intentionally does something fraudulent, illegal, or reckless that causes harm to the company or to someone else, or • Treats the LLC as an extension of his or her personal affairs, rather than as a separate legal entity This last exception is the most important If owners don't treat the LLC as a separate business, a court might decide that the LLC doesn't really exist and find that its owners are really doing business as individuals who are personally liable for their acts Yen Phuong – Bich Ngoc – Tuong Van FEATURES OF AN LLC IN THE US  An LLC’s Liability for Member’s Personal Debts Assets owned by an LLC generally cannot be directly taken by creditors to satisfy the personal debts of an owner Other actions that may be taken in such a situation vary by state, but may include:  Charging Order A Charging Order is a court order for the LLC to pay a member’s profits from the company directly to the creditor until the debt is satisfied  Foreclosure on LLC Interest A creditor may foreclose on the member’s ownership interest in the company to satisfy his personal debt  Order for Dissolution A creditor may obtain a court order that the LLC be dissolved In this case, the member’s income from the dissolution and sale of assets of the company paid to the creditor to satisfy the debt  Single Member LLC Protection There is some questions about whether a single-member LLC enjoys the same protection against debt collection as a multi-member LLC The purpose of requiring a Charging Order to take an owner’s profits is to protect the other LLC members In the event the company is owned by a single member, there is no need for such protection Courts in some states hold that single-member LLCs are not entitled to the protection of a Charging Order, allowing creditors to directly foreclose on the member’s interest in the company to satisfy personal obligations d) Taxation Like sole proprietorships (one-owned businesses) and partnerships, an LLC is not considered a separate entity 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 Yen Phuong – Bich Ngoc – Tuong Van FEATURES OF AN LLC IN THE US their personal tax returns LLC owners can elect to have their LLC taxed like a corporation There are some main taxation that LLC and their member have to pay:  Income tax The IRS1 treats LLC like a sole proprietorship or a partnership, depending on the number of members in LLC Single-Owner LLCs The IRS treats one-member LLCs as sole proprietorships for tax purposes This means that the LLC itself does not pay taxes and does not have to file a return (report all profits (or losses)) with the IRS Multi-Owner LLCs The IRS treats co-owned LLCs as partnerships for tax purposes Like one-member LLCs, co-owned LLCs not pay taxes on business income; instead, the LLC owners each pay taxes on their share of the profits on their personal income tax returns This may reduce taxes for LLC owners who need to retain a significant amount of profits in the company  Consider Electing Corporate Taxation If you will regularly need to keep a substantial amount of profits in your LLC (called "retained earnings"), you might benefit from electing corporate taxation Any LLC can choose to be treated like a corporation for tax purposes by filing IRS The Internal Revenue Service (IRS) is the revenue service of the United States federal government The IRS is responsible for collecting taxes and the administration of the Internal Revenue Code Yen Phuong – Bich Ngoc – Tuong Van FEATURES OF AN LLC IN THE US Form 8832, Entity Classification Election2, and checking the corporate tax treatment box on the form The corporate income tax rates for the first $75,000 of corporate taxable income are lower than the individual income tax rates that apply to most LLC owners, which can save you and your co-owners money in overall taxes In addition, electing corporate taxation can allow a LLC to offer owners and employees various tax-advantaged fringe benefits, stock options, and stock ownership plans  Self-Employment Taxes Self-employment tax is designed to account for the fact that self-employed individuals don't have Social Security and Medicare taxes taken out of their paychecks Unless you choose to be taxed like a corporation, LLCs are usually subject to selfemployment taxes This means that the profits of the LLC won’t be taxed at the corporate level, but will pass through to its members who will account for those profits on their personal federal tax returns Oftentimes, these taxes are higher than they would be at the corporate level Individual members will pay for federal items like Medicare and Social Security For this reason, if you choose to start an LLC, it’s a great idea to speak to a knowledgeable lawyer or accountant For example: If you earned any income in 2015 that didn't have payroll and Medicare taxes deducted, you may have to pay an additional tax known as selfemployment tax, which unfortunately can take another 15.3% out of your earnings An eligible entity uses this form to elect how it will be classified for federal tax purposes, as: a corporation, a partnership, or an entity disregarded as separate from its owner Yen Phuong – Bich Ngoc – Tuong Van FEATURES OF AN LLC IN THE US With that in mind, here are the details on self-employment tax so you'll know what to expect, and the best way to plan for next year B I FORMATION OF A LIMITED LIABILITY COMPANY Definition Incorporation is the legal process used to form a corporate entity or company A LLC is a separate legal entity from its owners, with its own rights and obligations Formation of a LLP is the forming of a new company, a company is a legal entity that is effectively recognized as a legal person under the law Company incorporation in the United States is administered at the state level – not the federal level – for both foreign nationals and U.S citizens II Steps to form a company The regulation for incorporation are set out under state law The process will differ state from state but is generally comprised of five main steps to form a LLC in the United States Choose a Name for Your LLC The name of a LLC must comply with the rules of the state's LLC division (Typically, this office is combined with the corporations division within the secretary of state's office) While requirements differ state from state, generally: Yen Phuong – Bich Ngoc – Tuong Van FEATURES OF AN LLC IN THE US • The name cannot be the same as the name of another LLC on file with the LLC office • The name must end with an LLC designator, such as "Limited Liability Company" or "Limited Company," or an abbreviation of one of these phrases (such as "LLC," "L.L.C.," or "Ltd Liability Co.") • The name cannot include certain words prohibited by the state, such as Bank, Insurance, Corporation or City (state rules differ on which words are prohibited) A state's LLC office can tell how to find out whether a proposed name is available A LLC name can be reserved for a short period of time for a small fee until the submission of articles of organization Besides following the state's LLC naming rules, a LLC name cannot violate another company's trademark When the articles of organization is filed, the business name will be automatically registered File Articles of Organization After settling on a name, the "articles of organization" is prepared and filed with the state's LLC filing office While most states use the term "articles of organization" to refer to the basic document required to create an LLC, some states call it a "certificate of formation" or "certificate of organization."  Filing Fees Yen Phuong – Bich Ngoc – Tuong Van FEATURES OF AN LLC IN THE US One disadvantage of forming an LLC instead of a partnership or a sole proprietorship is that there are payment of filing fee when a LLC’s articles of organization is submitted In most states, the fees are modest typically around $100 A few others take a bigger bite: California, for example, charges an $800 annual tax on top of its filing fee  Required Information Articles of organization are short, simple documents In fact, the LLC owners can usually prepare their own by filling in the blanks and checking the boxes on a form provided by the state's filing office Generally, all of the LLC owners may prepare and sign the articles, or they can appoint just one person to provide only your LLC's name, its address, and sometimes the names of all of the owners who are called members  Registered Agent The LLC owners will probably also be required to list the name and address of a person – usually one of the LLC members – who will act as the LLC's "registered agent," or "agent for service of process." Agent is the person designated to receive legal papers in any future lawsuit involving the LLC Create an LLC Operating Agreement Even though operating agreements need not be filed with the LLC filing office and are rarely required by state law, it is essential to create one In an LLC operating agreement, rules for the ownership and operation of the business are set out (much Yen Phuong – Bich Ngoc – Tuong Van FEATURES OF AN LLC IN THE US 10 like a partnership agreement or corporate bylaws) A typical operating agreement includes: • the members' percentage interests in the business • the members' rights and responsibilities • the members' voting power • how profits and losses will be allocated • how the LLC will be managed • rules for holding meetings and taking votes, and • "buy-sell" provisions, which determine what happens if a member wants to sell his or her interest, dies, or becomes disabled Publish a Notice (Some States Only) In a few states, there is an additional step to make a company official: the publication of a simple notice in a local newspaper,stating the intention to form an LLC The notice are published several times over a period of weeks and then there are submission of an "affidavit of publication" to the LLC filing office Get Licenses and Permits After the completion of the above steps, a LLC is official But before the LLC doors are opened for business, the owners of a LLC need to obtain the licenses and Yen Phuong – Bich Ngoc – Tuong Van FEATURES OF AN LLC IN THE US 11 permit that all new businesses must have to operate These may include a business license (sometimes also referred to as a "tax registration certificate"), a federal employer identification number, a sellers' permit, or a zoning permit C ADVANTAGES WHEN FORMING AN LLC Combining some elements of a corporation and some elements of a partnership/sole proprietorship, the LLC is not considered as a corporation, but it does provide some of the same protections a corporation offer Here are some more details on the main advantages of an LLC:  Limited liability As the name implies, members’ liabilities for the debts and obligations of the LLC are limited to their own investment This is one of the key advantages of a limited liability company In other words, if your company gets sued, your personal assets, like bank accounts and real estate, are protected At most, you can only lose the money you put into the business, and nothing else  Tax options Pass-through taxation principles apply and the company itself is not taxed unless it opts for being treated as a regular corporation All business profits, losses, and expenses are accounted for by its individual members Members have to show the earnings in their individual tax returns and accordingly pay taxes This allows the Yen Phuong – Bich Ngoc – Tuong Van FEATURES OF AN LLC IN THE US 12 avoidance of double taxation by way of corporate tax payment along with the individual income tax  Simplicity Another great advantage of LLCs over corporations is the ease of setting up and running them + Whereas incorporation can be an involved and costly process, all that is required to start an LLC is the filing of an Articles of Organization and the drafting of an Operating Agreement defining the company's policies and procedures (a filing fee, however, will still be required of LLCs) + And whereas a corporation requires a board of directors, officers, and regular shareholders' and directors' meetings, an LLC is not required to observe such formalities in its operation An LLC can be run from day to day essentially as if it were a partnership D DISADVANTAGES WHEN FORMING AN LLC U know, Choosing the right business formation has long-reaching repercussions (drawbacks) How you pay taxes, your personal liability, and the amount and type or regulations encountered are dependent on the way you form your business One of the most common choices is a Limited Liability Company (LLC) Let's look at some disadvantages of LLCs to help you choose the correct business structure for you  Building capital Yen Phuong – Bich Ngoc – Tuong Van FEATURES OF AN LLC IN THE US 13 Unlike corporations, which can issue stock in order to increase funds for their companies, LLCs have to work a little harder to find investors and sources of capital due to the greater legal obligations and state filings involved to add a new member to an LLC If you have a fast growth internet company that needs venture (adventurous) capital to scale, this limitation is one of the major disadvantages of a limited liability company  Confusion About Roles Whereas corporations have specific roles (like directors, managers, and employees), LLCs generally not This can make it difficult for the company and especially investors to know who’s in charge, who can sign certain contracts, etc Some of this confusion can be avoided by creating an LLC Operating Agreement The basic roles in a limited liability company are members, as owners are formally called, and member managers those members who actively participate in running the company State statutes that authorize LLC formation have basic requirements for members, but the roles they play can be further defined by the company’s operating agreement  Difficulty in sharing transfer Transfer of shares for small proprietary companies may be difficult as these companies are typically private companies run by a few people Usually those who have an existing interest in the company become your limited market to sell to A breakdown in the relationships between the parties adds to this difficulty Contrast this to a company listed on a stock exchange, where shares are easily sold and transferred (hard to sell as well as tranfer if breakdown rel btw shareholders) Yen Phuong – Bich Ngoc – Tuong Van FEATURES OF AN LLC IN THE US 14  Lack of case law The LLC business form is a relatively new concept As a result, not a lot of cases have been decided surrounding LLCs Case law is important because of predictability If you know a court has ruled a certain way, you can act accordingly to protect yourself But if few laws have been established yet, there is a certain level of vulnerability with your operations that could expose you to greater liability E CONCLUSION LLCs give you a great combination of flexibility and protection They shield members from personal liability while affording them an array of tax options Of course, an LLC might not be right for your business If you're having reservations, check our article of the tax considerations of each business type Therefore, you will make the right decision for your business Yen Phuong – Bich Ngoc – Tuong Van FEATURES OF AN LLC IN THE US Yen Phuong – Bich Ngoc – Tuong Van 15 [...]... show the earnings in their individual tax returns and accordingly pay taxes This allows the Yen Phuong – Bich Ngoc – Tuong Van FEATURES OF AN LLC IN THE US 12 avoidance of double taxation by way of corporate tax payment along with the individual income tax  Simplicity Another great advantage of LLCs over corporations is the ease of setting up and running them + Whereas incorporation can be an involved... be an involved and costly process, all that is required to start an LLC is the filing of an Articles of Organization and the drafting of an Operating Agreement defining the company's policies and procedures (a filing fee, however, will still be required of LLCs) + And whereas a corporation requires a board of directors, officers, and regular shareholders' and directors' meetings, an LLC is not required... Company (LLC) Let's look at some disadvantages of LLCs to help you choose the correct business structure for you  Building capital Yen Phuong – Bich Ngoc – Tuong Van FEATURES OF AN LLC IN THE US 13 Unlike corporations, which can issue stock in order to increase funds for their companies, LLCs have to work a little harder to find investors and sources of capital due to the greater legal obligations and... members, but the roles they play can be further defined by the company’s operating agreement  Difficulty in sharing transfer Transfer of shares for small proprietary companies may be difficult as these companies are typically private companies run by a few people Usually those who have an existing interest in the company become your limited market to sell to A breakdown in the relationships between the parties.. .FEATURES OF AN LLC IN THE US 11 permit that all new businesses must have to operate These may include a business license (sometimes also referred to as a "tax registration certificate"), a federal employer identification number, a sellers' permit, or a zoning permit C ADVANTAGES WHEN FORMING AN LLC Combining some elements of a corporation and some elements of a partnership/sole proprietorship, the. .. proprietorship, the LLC is not considered as a corporation, but it does provide some of the same protections a corporation offer Here are some more details on the main advantages of an LLC:  Limited liability As the name implies, members’ liabilities for the debts and obligations of the LLC are limited to their own investment This is one of the key advantages of a limited liability company In other words,... this to a company listed on a stock exchange, where shares are easily sold and transferred (hard to sell as well as tranfer if breakdown rel btw shareholders) Yen Phuong – Bich Ngoc – Tuong Van FEATURES OF AN LLC IN THE US 14  Lack of case law The LLC business form is a relatively new concept As a result, not a lot of cases have been decided surrounding LLCs Case law is important because of predictability... such formalities in its operation An LLC can be run from day to day essentially as if it were a partnership D DISADVANTAGES WHEN FORMING AN LLC U know, Choosing the right business formation has long-reaching repercussions (drawbacks) How you pay taxes, your personal liability, and the amount and type or regulations encountered are dependent on the way you form your business One of the most common choices... your company gets sued, your personal assets, like bank accounts and real estate, are protected At most, you can only lose the money you put into the business, and nothing else  Tax options Pass-through taxation principles apply and the company itself is not taxed unless it opts for being treated as a regular corporation All business profits, losses, and expenses are accounted for by its individual... the company and especially investors to know who’s in charge, who can sign certain contracts, etc Some of this confusion can be avoided by creating an LLC Operating Agreement The basic roles in a limited liability company are members, as owners are formally called, and member managers those members who actively participate in running the company State statutes that authorize LLC formation have basic