Starting Limited Liability Companies A limited liability company (LLC) is a hybrid entity that combines the tax flow-through aspects of a partnership with the liability protection of a corporation or a limited partnership. However, unlike limited partners in a limited partnership, who lose their limited liability status if they attempt to manage the business, a member of an LLC is not prohibited from managing the business.  | Warning Although the limited liability company form generally results in limited liability for its members, lenders usually require some or all members of a limited liability company to personally guarantee corporate loans. | | The LLC is a relatively new type of entity that has only recently become available in all 50 states. Since it is so new, the laws among the various states differ somewhat in their treatment of an LLC. As a result, transactions outside the state of formation by the LLC may be treated differently from transactions within the state of formation. Prior to 1997, an LLC was treated as either a partnership or an association taxable as a corporation for federal tax purposes depending on whether the LLC possessed more than two of the four corporate characteristics that generally pertain to corporations. The four corporate characteristics are: continuity of life , centralization of management , limited liability , and free transferability of interests . If the LLC had more than two of the corporate characteristics, it would be treated as an association taxable as a corporation. Consequently, most LLCs formed before 1997 wrote their operating agreements to avoid at least two of the corporate characteristics. Beginning in 1997, federal regulations assume that a new unincorporated business with more than one owner is treated as a partnership, regardless of how many corporate characteristics it has. Businesses can elect to be treated as a corporation by filing Form 8832, Entity Classification Election. Older LLCs will be presumed to continue the federal tax status they had on January 1, 1997. Forming an LLC. To form an LLC, articles of organization must be filed with the secretary of state's office. The articles of organization contain information about the LLC, such as its name, address, purpose, who organized it, who the registered agent is, etc. The operating agreement is similar to a partnership agreement. Its purpose is to guide the conduct of the business. If the operating agreement is not required to be filed with the articles of organization, it can generally be in written or oral form. As a precautionary measure, the operating agreement should be written to limit future conflicts. In addition, you must consider whether the company will conduct business across state lines. If so, you may consider forming the LLC out-of-state . You also have option of qualifying the LLC as a foreign entity with state authorities, registering it to do business within that state's borders . The foreign qua... |
