FEATURES OF AN LLC IN THE
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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 do not restrict ownership, and
so members may include individuals, corporations, other LLCs and foreign
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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 do
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

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 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.
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 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
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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 do 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

1 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

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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 do 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.
2 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.

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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.
1.


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:

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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.
2.

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

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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.
3.

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
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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.
4.

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.
5.

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
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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
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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

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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 do 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)
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 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.

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