A limited liability company is a most popular business type with budding entrepreneurs and startups because it’s viewed by most as a solid entity that can withstand and survive the tremors associated with starting a business. The survival rate of startups is incredibly low, and it’s estimated that for every 20 startups only about 5, graduate to limited liability companies. Most small business people prefer LLCs because they offer flexibility regarding operations, and protection against liabilities, especially when it comes to taxes. And while regulations governing the formation of LLCs vary from state to state, there exist a variety of common features while incorporating LLCs that apply in most areas.
- Simplicity in Operation and Documentation
An essential feature of an LLC is simplicity regarding operations and documentations. While existing as a separate entity an LLC possess limited liability and is flexible when handling tax returns. In many states, the requirement to hold an annual shareholder’s meeting has been relaxed. This has made the preparation and filing of minutes of meetings, not a mandatory requirement. This simplicity extends to top management where LLCs are not required to appoint a board of directors, unlike large corporations. The strict regulations that govern the management of records in large corporations are also relaxed in LLCs and less burdensome.
- Separate Legal Existence
LLCs possess separate legal existence quite apart from its members. If a group of people come together and decide to run a business together, in an unincorporated union, they will simply remain a collection of persons who run a business and incur debts belonging to the firm. A limited liability company is a separate entity. It can hire employees. It can purchase and sell assets. It can sue and get sued. And although this varies from state to state, a typical feature is that even after a key member withdraws, it continues to exist.
- Flexible in Taxation
The Inland Revenue Service does not have a separate set of regulations for taxing LLCs. And hence the flexibility. They are taxed as either Partnerships, where members are many, sole proprietorships, where there is a single member, or corporations, in multi-member organizations. For businesses, members may choose to pay taxes either as a Chapter C corporation, or Sub-chapter S corporation. A chapter S-corp or a chapter-C-corp. This is special IRS coding and governs corporations. This flexibility grants members the freedom to choose the type of taxation that makes the best sense for the business.
- Enjoy Limited Liability
A limited liability company, as the name suggests, grants limited liability to members. Where employees, managers, and other members are responsible for their civil wrongs, or misconducts, the limited liabilities member remains protected against civil wrongs committed by other colleagues, employees or managers. This special characteristic allows members to hire employees and perform high-risk business that would otherwise endanger the member’s assets when faced with litigation. In effect, members are not liable the liabilities and debts of the LLC.
How to Start a Limited Liability Company
Starting a limited liability company is not as difficult as some people imagine. Here are steps that will guide you and make your LLC a legal entity.
- Select an available business name that will comply with the Limited Liability rules in your state. Make sure the name does not resemble another name in the area. It must end with an LLC for “Limited Liability Company” or Limited Company.
- Hire an attorney to draft Articles of Association. This is a legal requirement. And it must be submitted to the state’s LLC filing office. Some states will call it “Certificate of Formation.” Others “Certificate of Organization.” Most literate entrepreneurs can draft their own Articles of Association. They are short and straightforward. A standard form exists where they require you to only fill in the blanks and checking boxes. Key features include the names and addresses of all owners. Where needed, all members will be required to sign, but some members designate one member to sign on their behalf.
- File the Articles of Association accompanied by filing fees. This ranges from $100 to $800, depending on your location.
- Create an LLC Operating Agreement
This is an agreement that sets out rules and operations of the business. They must be filed at the State’s Limited Liability Company’s office. An LLC agreement will usually deal with crucial matters that form the core of the company, such as:
– Profits and Losses
– Property ownership
– Meetings and decision-making
– New members admissions
– Expulsion of errand members/retirement
– Insurance and indemnities
– Other covenants
- Draft a Limited Liability Agreement with states the rights and responsibilities of each member.
- Before opening for business, obtain local trading licenses and permits that the state regulators may demand. These may include zoning permit, business license, etc.
- Publish a simple notice in the local newspapers announcing your intention to form a LLC
- You will also be required to publish an Affidavit of Publication to the state LLC office. Most major newspapers have a desk that assists in this requirement.
Disclosure Requirements of a Limited Liability Company
Every Limited Liability Company is required to affix or paint its name outside every premise or office of the business, in clearly legible letters and a conspicuous manner. The LLC name must also appear, legibly, on all documents of activity including:
- Cheques, Invoices, and Receipts
- Business letters and all forms belonging to the LLC
- Notices and Publications
The law requires that order forms, business letters and other documents of the LLC must also specify:
- The registered number of the LLC, and place of registration
- The address of the registered office
- The letters LLC
If the LLC fails to comply with these requirements, it may attract statutory fines and penalties, for the LLC, all members in default.It’s also a requirement that LLCs provide financial information when called upon to do so. These includes:
- Annual returns
- Annual accounts
- Notification of any changes including changes to registered office
- Changes to any memberships, status, etc.
In conclusion, if wrongful trading is detected, and attributed to an individual member, particularly if the LLC is facing insolvency, or with a view to defraud members, the member may be held personally liable. Penalties could be potentially unlimited, and the guilty member may be forced to make appropriate contributions “as the court may deem proper.”