The Limited Liability Company (“LLC”) has stepped in the spotlight as one of the most popular business structures in the United States. A LLC is formed by filing a certificate of formation with the Secretary of State in the state you which to be organized. The owners of an LLC are called its members. An LLC offers protection. The profits and losses of your business will pass through to the owners, who will then report it on your personal tax returns, just as if they were owned by a partnership or sole proprietorship. LLCs can be formed in many styles, including as a corporation, single member LLCs and LLC Partnerships, to name a few.
The summary that follows should not supplement the work of an experienced attorney, but rather, as a start up in addressing you blossoming business’s needs. Please keep in mind that this is not a comprehensive guide of how to form a LLC, but rather, should be used to assist you in determining which business structure is right for you. If you need advanced accounting or tax help, it is advised to find a knowledgeable tax attorney or accountant.
LLC regulations two standard form agreements. You must file Articles of Organization with the Secretary of State. There is a $99.00 filing fee that must be paid upon submission of the documents. Articles of Organization must include: (1) Contact details for approval certificate, (2) LLC name, (3) Effective date of the LLC, (4) duration (if applicable), (5) Purpose of LLC, (6) Name and Contact information of registered agent, and (7) Name and Contact information of a member, manager authorized representative.
Although LLCs in Ohio are not required to have an Operating Agreement, it is wise to have one in place with other members, should your LLC have more than one member. The state of Ohio recognizes LLC Operating Agreements as governing documents. An Operating Agreement, much like a partnership agreement, specifies the interworking’s of the LLC such as financial obligations of the members; and outlines how profits, losses, and distributions will be shared. The Operating Agreement must be tailored to suit the needs of each individual LLC.
Advantages to the LLC form:
Tax Shield: An LLC creates an entity that the IRS considered to be a distinct separate entity for tax purposes. Therefore, members of the LLC get to determine how they will be taxed. As mentioned, the Operating Agreement will serve as an outline for how the LLC will be treated for tax purposes. However, it is possible that the IRS may automatically classify your LLC as a corporation for tax purposes. For more information on this, please visit IRS.gov.
LLC Corporation: The members of the LLC can choose to be taxed as if they were a corporation.
Single-Member LLC: Members of single-member LLC’s may choose to be taxed like a sole proprietorship. Profits or losses from the business are not taxed directly but instead are taxed through the single member’s “personal” federal tax return.
LLC Partnerships: Members may elect to be treated like a traditional partnership for tax purposes.
Flexibility in Management: LLC statutes contemplate an LLC being either member managed or manager managed.
Member-managed: Is similar to partnership or decentralized management; the statute vests the members with the authority to manage the LLC.
Manager-managed: Is similar to corporate or centralized management; the statute vests management authority in a board of managers elected by the LLC members.
Limited Liability: Members are protected from personal liability for business decisions or actions of the LLC. This is similar to the liability protections afforded to shareholders of a corporation. Creditors are foreclosed from seeking the personal assets of the LLCs members. It is a meaningful shield not provided in a sole proprietorship or traditional partnership. However, it is important to understand that limited liability really is “limited.” This means members are not necessarily shielded from wrongful acts, in particular mistakes made in running the business.
Disadvantages to the LLC form:
Self-Employment Tax: Along with the tax implications already mentioned. Members of LLC Partnerships will be required to pay self-employment taxes. Therefore, unless you choose to be taxed as a corporation you will be subject to self-employment tax. The profits of the LLC are not taxed at the corporate level, but passes through to its members who will account for those profits on their individual federal tax returns. This means that you may be required to provide for Social Security and Medicare Please note; these taxes may be higher than at the corporate level.
Less Structure: The lack of strict requirements for governing the business could mean problems down the road unless a detailed Operating Agreement is in place, which requires additional upfront costs but will limit issues in the future.
Lack of Uniformity among LLC Statutes: There is a lack of uniformity among LLC statutes. Businesses that operate in more than one state may not receive consistent treatment once they leave their home state.
Forming an LLC is an important legal step in developing your business. While LLC Partnerships may not be the best business structure for you, please see our other blogs in regard to the other available business structures. If you have any questions regarding your next steps with your newly formed business, please contact Attorney Allison Harrison at (614)440-1395 or via e-mail at email@example.com.
By Attorney Chad A. Hirschauer