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A limited liability company (LLC) is a business structure in the U.S. that protects its owners from personal responsibility for its debts or liabilities. Limited liability companies are hybrid entities that combine the characteristics of a corporation with those of a partnership or sole proprietorship.
Limited liability companies are permitted under state statutes, and the regulations governing them vary from state to state. LLC owners are generally called members.
Many states don’t restrict ownership, meaning anyone can be a member including individuals, corporations, foreigners, foreign entities, and even other LLCs. Some entities, though, cannot form LLCs, including banks and insurance companies.
An LLC is a formal business arrangement that requires articles of organization to be filed with the state. An LLC is easier to set up than a corporation and provides more flexibility and protection for its investors.
Although the requirements for LLCs vary by state, in general, there are some common points. The first thing owners or members must do is choose a name.
Next, the articles of organization can be documented and filed with the state. These articles set forth the rights, powers, duties, responsibilities, and other obligations of each member of the LLC. Other information included in the documents is the name and address of the LLC members, the name of the LLC’s registered agent, and the company’s mission statement.
Articles of organization are filed, along with a fee paid directly to the state. Additional paperwork and fees must also be filed at the federal level to obtain an employer identification number (EIN).
While this is just a summary of how we can create an entity, keep reading and you will find a step-by-step on how to form your next entity and what you should consider before you get started.
Ultimately, creating a limited liability company (LLC) will help safeguard your personal assets and help you grow your business.
Small business owners prefer LLCs because they’re relatively inexpensive and easy to manage. We’ll go over all of the 6 benefits of an LLC below.
The main advantage of LLCs is that they provide members with personal liability protection. This means that an owner’s personal financial assets aren’t in danger if the LLC goes into debt or is sued.
LLCs are responsible for their own debts and obligations, and although you can lose the money you have invested in the company, personal assets such as your home and bank account can’t be used to collect on business debts. Your personal assets are also protected if an employee, business partner or the business itself is sued for negligence.
LLCs get the best of all worlds when it comes to taxation. LLCs don’t have their own federal tax classification but can adopt the tax status of sole proprietorships, partnerships, S corporations or C corporations.
The Internal Revenue Service automatically classifies LLCs as either partnerships or sole proprietorships, depending on whether they have one owner or more than one owner. This means that LLCs can always take advantage of “pass-through” taxation in which the LLC does not pay any LLC taxes or corporate taxes. Instead, the LLC’s income and expenses pass through to the owners’ personal tax returns, and the owners pay personal income tax on any profits.
Corporations are more regulated than LLCs and have considerably more paperwork. LLCs are not required to have a board of directors, keep meeting minutes, or hold shareholder meetings. This means much less time and money spent on keeping records and filing compliance-related documents.
Corporations also offer limited liability, but they have to observe certain requirements that may not be well suited to a small, informally run business.
LLCs are generally simple and inexpensive to form compared to other business entities. Incorporation fees vary from state to state, but it usually doesn’t cost more than a few hundred dollars to form an LLC.
There’s also a minimal amount of paperwork that needs to be filed at the time of formation, which typically includes a short form from the state’s business commission. You can check your state government’s website for the local application process and fees.
Compared to C corps and S corps, LLCs are very easy to start. While you can form your LLC yourself, it is recommended to have professional help as certain documents such as the operating agreement can be complex.
LLCs can decide between member-managed vs. manager-managed structures.
Member-managed means that the members are actively involved in managing the company’s operations.
In a manager-managed LLC, the members delegate the responsibility of managing the company to a manager, who may or may not be a member. In this case, some, or all, members may act more as passive investors.
Corporations have a fixed management structure that consists of a board of directors that oversees company policies and officers who run the day-to-day business. Owners, also known as shareholders, must meet every year to elect directors and conduct other company business.
LLCs don’t have to use this formal structure, and an LLC’s owners have more choices about the way they run the business and make decisions.
Forming an LLC is a step up in credibility from a sole proprietorship or partnership. Customers and other businesses will find an LLC more credible, and starting an LLC can show people that you are taking your business seriously.
Most business owners have similar wants, needs, and goals, but it’s how we achieve them that differs. That’s why you must choose the right type of LLC.
Fortunately, the procedure for registering each type of LLC is similar in most 50 states. The important question is: What’s the best type of LLC for your business? And the answer is… it depends on what you want to accomplish.
Keep reading and we will describe what types of LLCs exist and what are their key characteristics. We hope this will help you decide.
One of the most common types of small businesses in the U.S. is a single-owner or single-member LLC. This is a business entity registered in the state of formation, which usually will be where the company does business.
The term single-member is used to recognize that the LLC has one owner, as opposed to an LLC in which there is more than one owner. A single-member LLC has all the same advantages, and disadvantages as a multi-member limited liability company.
A multi-member LLC, also called a MMLLC, is a limited liability company that has two or more owners. In an LLC business structure, owners are referred to as members.
MMLLCs can have an infinite number of members and members can be individuals, other LLCs, or corporations. MMLLCs offer the flexibility of a partnership with the asset protection of a corporation.
When a multi-member LLC is established, the members must make the important decision of whether the company will be a member-managed LLC or a manager-managed LLC. This decision will affect how the company works.
Member-Managed LLC– Unless the company’s formation documents specify that the company will be a manager-managed LLC, the state will consider the LLC as a member-managed LLC by default. In a member-managed LLC, the owners of the company all participate in the operation of the business. All members have the power to make important decisions, sign contracts, and manage operations.
Manager-Managed LLC– A manager-managed LLC is a good option when there are a lot of members in an LLC. A manager is appointed to run the day-to-day operations. The owners still retain the power to make important business decisions, but the manager takes care of the daily operations.
It is important to have an operating agreement for an MMLLC because this document will lay out the management structure as well as the roles and responsibilities of the members and managers in the company.
In some states, you can form a “Series LLC.” What exactly is a Series LLC, and why would this be advantageous to those looking to start investing in real estate?
A Series LLC is a unique form of an LLC where you are provided with the ability to separate assets and operations into independent series — essentially providing you with the ability to form mini-LLCs or DBAs but have them all under one umbrella company. Each “mini” LLC is protected from each other in case of lawsuit or litigation. However, not all states offer this type of LLC.
Limited liability companies have become one of the most popular business entities for acquiring real estate. Owners often prefer to form an LLC when purchasing real estate so that the LLC becomes the legal owner of record, rather than the individual members.
As a real estate investor, you will have all the benefits mentioned above, but if you want to be in real estate full-time and are thinking of expanding your portfolio, you should consider forming an LLC for each of your properties.
The idea of having to go through all the steps of forming an entity with each property may tempt you to maintain a single LLC to manage all of your real estate. But this may not be the best solution! There are several reasons why you should form an LLC for each separate real estate property, which we will describe below.
Forming an LLC is crucial for business owners to separate their personal and business assets and liability. You never know when a tenant may sue you, and insurance sometimes isn’t enough to foot the bill – leaving you with a considerable difference that needs to be paid. Creating an LLC for each property will protect your personal property, along with all of your other properties, should you be subject to a lawsuit.
It is not unreasonable to imagine a tenant trying to hold a landlord liable for hundreds of thousands of dollars, especially if personal injury is involved, such as a fall down the stairs. If you opt-out of separating each of your real estate investments and keep them grouped together in a single LLC, they could all be at risk, and there is no real separation in the event of a lawsuit, depreciation, or liability hanging over your head.
With separate LLCs, you have the ability to better manage each individual real estate investment when buying, selling, or renting property.
After you create your real estate LLC, make sure you open up a business bank account for that property. Any funds you use to perform repairs and maintenance, store tenant deposits, etc., should be transmitted through that account.
Having separate finances and bank accounts for each property can help you understand what money is coming into and going out of each LLC (property). You’ll be able to quickly see how much you’ve spent on each property and you can even keep your annual LLC fees organized by property. This prevents you from having to spend time later trying to figure out what properties are profitable and what properties may have caused losses.
Creating multiple LLCs and establishing credit as a business owner will keep your personal finances protected. You can look at business credit in the same manner as you do personal credit. When you need money and ask for a loan, many banks will decline your loan application because you don’t have any credit. Your ability to get the funding necessary to purchase properties, make renovations and pay for expenses all falls on whether or not you have the credit banks are looking for.
The better your business credit is, the easier the process goes, and the greater your chances are of getting approved for the amount you’re asking for. Any credit inquiries and loans are taken out under your LLC will not affect your personal credit history, keeping your personal and business finances separate.
We can’t discuss the benefits of creating separate real estate LLCs without mentioning the potential tax implications. Pass-through taxation is another main reason why it makes sense to choose an LLC as the entity to represent your real estate investments.
real estate investors who use LLCs to own their real estate holdings can typically benefit from mortgage interest deductions on all their properties the same way other types of sole proprietors can benefit from different kinds of deductions. This is because LLCs are a “pass-through entity,” where the business income gets reported on your personal income tax return.
Probably the most obvious advantage to forming an LLC is protecting your personal assets by limiting the liability to the resources of the business itself. In most cases, the LLC will protect your personal assets from claims against the business, including lawsuits.
There is also the tax benefit to an LLC. This is particularly true in relation to “C corporations,” which the IRS recognizes as independent entities. Taxes must first be paid on net income to a corporation, before that income is distributed to the owner, where it is taxed again at an individual level. This is what is known as double taxation, which you can avoid entirely with an LLC.
Another benefit is something of a soft advantage: having “LLC” or “Limited Liability Company” in your business name can make your business seem somehow more official. It implies that the business is registered with the state, and is somehow more substantial as a legal entity.
Disadvantages of starting a business without an LLC include:
The following six steps will help you get started if you are interested in forming an LLC.
When you decide to create a limited liability company (LLC), you can choose to incorporate in any state, regardless of where you are doing business. But in most circumstances, your home state will be your most effective choice. This is because your company is doing business primarily in that state, whether it is a physical business or an online business.
If you incorporate your business in another state, you will likely still meet the criteria for doing business in your home state. So even if you incorporate in Delaware, Nevada or Wyoming, you will still have to file in your home state, which eliminates any tax or cost savings.
When you form your LLC in your home state, there’s a big convenience factor because you’re already familiar with the laws and procedures, you have contacts there, and all the government offices are within your state. Also worth considering:
A domestic LLC is a company formed and registered in the same state where it conducts business.
A foreign LLC is a company doing business outside its state of formation.
To form an LLC, you must select a business name that complies with state regulations. The name you select cannot be the same as or even too similar to any other LLC’s name; you’ll need to complete a business name search online to make sure your LLC name is unique and you’ll need to meet your state’s naming guidelines.
As simplistic as this step may seem, it is critical to successfully establishing an LLC and being able to take advantage of the legal protections this business structure provides.
Here are some of the most common state LLC naming rules you should be aware of when choosing the name of your next LLC:
When you form an LLC, you’ll be asked to name a registered agent. But what’s a registered agent and what do you need to know to choose one?
A Registered Agent is a person or service designated to receive mail for a business entity. They ensures that your business doesn’t miss important paperwork like lawsuits, tax notices, and other business documents.
To make it easier to determine who should receive important paperwork for an LLC, all states require business entities to keep the name and address of a registered agent with the Secretary of State.
In addition to lawsuits, registered agents may receive subpoenas, tax notices and other official correspondence. They are responsible for passing these documents along to the appropriate person.
Registered agent requirements vary slightly from state to state, but there are a few general rules:
When deciding who should serve as the registered agent, keep in mind that the registered agent will typically be the first person to whom the state reaches out if any issues arise with your LLC. As a result, it is important to ensure that your registered agent consistently checks incoming correspondence and relays that information to you as the business owner.
Filing your articles of organization with your Secretary of State officially forms your limited liability company. In some states, these articles are also known as a certificate of formation or a certificate of organization.
Filing the articles of organization can be done online or via mail. The exact filing fee will vary by state. It’s very important to provide error-free information when filing this document.
Formation documents must include:
This information becomes public record, so be mindful of what information you are comfortable sharing with the world. Keep in mind that any start-up costs and filing fees you incur are tax-deductible.
Now is a good time to decide whether your LLC will be member-managed or manager-managed. Before filing your Articles of Organization, you need to make a decision on how your business will be managed.
LLCs have two management structures:
Once your organizational files have been accepted…congratulations, you are now officially a business owner!
The operating agreement is your LLC’s most essential document. It sets the rules for how your company works internally and with the public. It’s thus crucial to make sure your business structure works for you.
Most states do not require LLCs to have operating agreements, but having one is an important way to start on the right foot and give your business the best chance at success.
The purpose of a limited liability company is to protect your personal assets. If your business gets sued or goes bankrupt, your personal assets, such as houses, cars, and savings, are not at risk.
And without personal liability protection, your business entity is more like a sole proprietorship, meaning creditors can go after your personal assets. The result can be a disaster for your business and your life.
The LLC operating agreement expressly sets down the relationship between you, other LLC members, and the company. It ensures that you and other members get the full protection of the LLC business structure and that the business runs properly.
Operating agreements ensure these protections in many different ways:
Putting together an operating agreement may sound intimidating. Contact us and we will be happy to guide you and create an operating agreement according to your business needs.
An Employer Identification Number (abbreviation: EIN) or, incorrectly, EIN Number is your LLC’s nine-digit tax identification number. Think of it as your LLC’s social security number. The IRS uses these numbers to keep track of business entities for tax purposes.
The Government requires EINs for all LLCs that generate revenue or want to hire employees. Most banks also require an EIN to open a business bank account.
An EIN must be applied for through the IRS. Applications can be submitted online, or Form SS-4 can be submitted by mail. The EIN will be received immediately upon completion of the online form.
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