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Forming a Limited Liability Company (LLC) - Step by Step Guide

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					This is a step-by-step guide on how to form a Limited Liability Company ("LLC"). LLCs
are often the most beneficial classification for business entities because they provide for
the limited liability of corporations while having the benefits of partnership taxation. In
order for the LLC to be valid, they must have an operating agreement and must file the
Articles of Organization with the Secretary of State. This step-by-step guide on how to
form an LLC is ideal for small businesses that want to operate as an LLC.
LLC Guide Table of Contents
How to use this Guide: ........................................................................................................ 0
Do I need a lawyer to form an LLC? .................................................................................. 0
How do I find a reputable law firm? ................................................................................... 0
Frequently Asked Questions ............................................................................................... 1
  What is an LLC? ............................................................................................................. 2
  Are LLC’s new to the business? ..................................................................................... 2
  How do I form an LLC?.................................................................................................. 2
  What is a single-member LLC? ...................................................................................... 3
  Who should consider forming an LLC?.......................................................................... 3
  Where should I form my LLC? ....................................................................................... 3
  How do I decide if I should form an LLC or an S corporation? ..................................... 4
  What is the difference between an LLC and a partnership? ........................................... 4
  Where can I view rules for LLC’s?................................................................................. 5
  Who controls an LLC? .................................................................................................... 5
  How many people are required to form an LLC? ........................................................... 5
  What is an Agent for the Service of Process? ................................................................. 5
  What is a publication requirement for an LLC? ............................................................. 6
  Where can I view further information about LLC’s and corporations?.......................... 6
  How are LLC’s taxed? .................................................................................................... 6
  Choosing a name for your LLC ...................................................................................... 7
Steps in Forming an LLC .................................................................................................... 7
Advantages s. Disadvantages of Forming an LLC ............................................................. 8
  Advantages ...................................................................................................................... 8
  Disadvantages ................................................................................................................. 8




© Copyright 2011 Docstoc Inc. registered document proprietary, copy not                                                        2
                     A GUIDE TO FORMING A LIMITED
                        LIABILITY COMPANY (LLC)

HOW TO USE THIS GUIDE:

       As a business owner, there are many important business decisions to make with regard to
your company. But perhaps one of the first and most important decisions you will make is how
to structure your company.      A limited liability company has some of the attributes of a
corporation and a partnership. Based on your unique set of circumstances it may be an option to
consider. This guide walks the user through what this kind of business structure affords and how
it may work for you. It will not only highlight the advantages, but the disadvantages as well.
This guide is not a substitute for legal advice, and should you have any questions consult your
attorney.


DO I NEED A LAWYER TO FORM AN LLC?


       You do not need a lawyer for file your own LLC. Each state has fairly simple forms to
fill out and file with the Secretary of State. The decision to choose an LLC as your business
structure, however, is more complex. Each type of business structure (partnership, corporation,
sole proprietorship, etc.) has its advantages and disadvantages. If you are at all in question as to
which structure to choose, it may be a good idea to consult with a lawyer. You want to be sure
that you are clear on your choice, as the structure of the business creates the rules by which you
will run your business in many ways and how you will file your taxes.


HOW DO I FIND A REPUTABLE LAW FIRM?


       If you have decided to retain a lawyer, you will want to find a firm and lawyer with
plenty of experience and a great track record. Make sure that you find a lawyer that specializes
in corporate law. The legal field is vast, and a lawyer needs to be specialized in a particular
field. Some lawyers may take any type of case just to keep the money coming in, but they are
not necessarily well versed in one particular subject.

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        Check your phone book, the internet, your local bar association, or even word of mouth
to get the names of a few good lawyers. Most will meet for you the first time for free. Use this
time to interview them. What is their experience, how much do they charge, and what can you
expect for your money?




FREQUENTLY ASKED QUESTIONS



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What is an LLC?


          A limited liability company is a business structure where, as with a partnership or sole
proprietorship, the losses of the company are reported on the owner’s tax returns. The LLC is
not a separate taxable entity, like in the case of a corporation. However the owners are protected
from personal liability for the company’s debts.


Are LLC’s new to the business?


          The limited liability company is a fairly new business structure. The very first statute
allowing LLC’s was enacted in 1977.             In 1988, a beneficial tax ruling was enacted, and
eventually all states passed LLC statutes.


How do I form an LLC?


          Creating an LLC is actually quite simple. In most states all that is required is the filing of
Articles of Organization with the Secretary of State and paying a filing fee. Most states will
provide a fill-in-the blank form for the Articles. You can obtain this form by mail or download
one from your state’s website. Some states may also require you to publish your intention to
create an LLC in the newspaper prior to filing your Articles.


          Another document that is important for the formation of the LLC but not necessarily
required by the Secretary of State is an Organizational Agreement. The Operating Agreement
will set out the general rights and responsibilities of the owners and set out how the business will
be run.




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What is a single-member LLC?


        A single-member LLC is an LLC company with just one member. This type of company
is sometimes referred to as a SMLLC (single-member limited liability company). In the past
states required that to qualify for LLC status there must be more than one member. However
over time this has changed and now all fifth states allow them. The unique distinction with this
type of structure is that unless the entity elects to be treated as a corporation for tax purposes, the
IRS disregards this type of structure. That means that if the entity has not elected to be treated as
a corporation, the taxes will be reported on schedule C of the individual’s tax return. If the
single-member is a corporation or partnership, taxes will be reported on that entity’s tax return.


Who should consider forming an LLC?


        People that are concerned about personal exposure from their business should look into
forming an LLC. Having an LLC protects the business owner from potential claims that may
arise. If a claim arises, the personal assets of the business owner are protected.


        It is important to note that not all businesses are able to become an LLC, such as banks,
trust, and insurance companies. Each state is also different; for instance, in California, doctors,
accountants, and healthcare workers are prohibited from operating as an LLC.


Where should I form my LLC?


        Usually it is recommended to form your LLC in the state where you are physically
located and doing business. If you form your LLC in one state, but end up doing business in
another, you will be required to register in the other state as a “foreign corporation.” Also if you
file in one state and do business in another you will need to file tax returns and annual reports in
both states.


        That said there are people that choose to form their LLC in a particular state because of
advantageous tax laws. Two states that are popular for favorable tax policies are Nevada and
Delaware.

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How do I decide if I should form an LLC or an S-corporation (“S-Corp”)?


        Both limited liability companies and S-Corps are quite popular right now. They both
share similar attributes where the business owner is protected from personal liability. Each type
of organizational structure does have its pros and cons however. Which type of entity you chose
depends on your unique circumstances.


        In general, limited liability companies are easy to form, and simple to operate. There is
far less administrative work to maintain the entity than a corporation. A few drawbacks are that
the LLC has a more limited life span.            Things like the death of a partner or bankruptcy
automatically terminate the entity. Also an owner of a limited liability company is considered
self employed. Therefore the owner’s entire net income is subject to a 15.3% employment tax.


        An S-Corp is a corporation that receives a special designation as such from the IRS. A
corporation is considered a separate entity, separate and apart from the people who own it.
Losses and profits pass through to the shareholder’s personal tax return. The advantage here is
that only the wages of the shareholders are subject to employment tax. The remaining income of
an S-corporation can be paid out as a distribution and taxed at a substantially lower rate, if at all.
On the con side, an S-Corp must be maintained by way of annual shareholder and director
meetings, regular updates of corporate documentation, and state filings.


        It is actually possible, to elect an S-Corp status for your LLC company. There are pros
and cons to this as well, and its always best to consult with a lawyer in this case to weigh your
options.


What is the difference between an LLC and a partnership?


        The main difference in this instance is that owners in a partnership do not have limited
liability protection as in the case of an LLC. In the case of an LLC, owners are not personally
liable for the company’s liabilities.


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        In order to create an LLC, there is formal paperwork that must be filed and filing fees to
be paid. In this case of a partnership, there are no formal requirements for creating one.


        Both structures are almost the same in the way they are taxed. In both instances, the
partners report the profits and losses on their personal tax returns.


Where can I view rules for LLC’s?


        The easiest way is to search online for the Secretary of State in the state you want to form
your LLC in. These websites can give the reader a good overview of the requirements for filing
an LLC. Beyond the Secretary of State, there are many useful websites and books on the subject
that can be obtained from your local library.


Who controls an LLC?


        An LLC is controlled by its owners. The founding members of the organization have the
option of running the company themselves, or they can elect managers to run the company for
them. This flexibility is one the advantages of creating an LLC.


How many people are required to form an LLC?


        In most states only one person is required to form an LLC. However in terms of taxation,
the IRS does not recognize single-member LLC’s. Also, each state has their own unique laws as
to how they are handled, so be sure to check your local state law.


What is an Agent for the Service of Process?


        The concept behind a registered agent of agent for the service of process is that if your
LLC is ever sued, the plaintiff’s attorney will serve the paperwork on your agent for service of
process. The law provides that the owner of an LLC cannot physically accept service in a
lawsuit, so the state requires that someone be designated to accept the paperwork. This agent is

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usually a designated individual or business entity. In the formation paperwork filed with the
state you will be required to name who your agent is, and their current address. There are
businesses that actually provide this service for companies for a small annual fee.




What is a publication requirement for an LLC?


        In some states it is required that the company publish notice of their intention to form a
company. It is generally required that the publication be in a widely distributed publication in
the state in which they do business. Currently there are only a few states that require publication
for an LLC: Arizona, Nebraska, and New York.


Where can I view further information about LLC’s and corporations?


        The Secretary of State is a great resource for all types of information related to the
formation of businesses.         Virtually all required forms can be obtained via the internet;
information regarding filing fees and procedures are also covered. If you are still in doubt as to
what type of business entity to create, it is always wise to consult your lawyer or accountant.


How are LLC’s taxed?


        The IRS has various ways of viewing an LLC for tax purposes, primarily dependent on
how many members are involved in the LLC. An LLC with only one member is taxed as a sole
proprietorship.    If there are two or more members, the IRS will view the company as a
partnership (unless it has elected to be treated as a corporation). If the LLC does not specifically
elect a particular classification it will be taxed as a sole proprietorship for one member, and if
there are two or more members it will be taxed as a partnership.


        State taxes are a different story. Usually states impose an annual charge, or they will
charge a tax based on gross receipts.




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Choosing a name for your LLC


Each state has specific rules as to what words are included in your company name. Therefore
prior to drafting your documents, do a little research to make sure the name you have chosen is
useable. You will need to conduct a name search to determine that the name you have chosen is
not already being used by another LLC in the state in which you are doing business. It is also
usually required that the name include words or abbreviations that designate it as a limited
liability company. Depending on the state, the LLC name usually cannot include such words as
Bank, Insurance, Corporation, or City.




STEPS IN FORMING AN LLC


    1. Choose a name for your business, and make sure it is available and complies with your
        state’s LLC rules;


    2. Obtain the required formation documents, usually Articles of Organization, and file them
        with the Secretary of State, and pay the filing fee (typically $100-$200.);


    3. Draft an LLC Operating Agreement, setting out the responsibilities of the members;


    4. Publish notice of your intent to create an LLC (this is required in only a few states);


    5. Obtain any required licenses or permits required for doing business (a local county
        business license, for example).




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ADVANTAGES AND DISADVANTAGES OF FORMING AN LLC


Advantages


    1. Members of an LLC have limited liability; their personal assets are protected;


    2. Members of an LLC have pass-through taxation similar to a partnership (the profits or
        losses of the LLC pass through to the member’s personal tax returns);


    3. LLC’s have all the benefits of a corporation without the drawbacks, such as more
        paperwork and double taxation;


    4. A corporation can be a member of an LLC, which allows additional benefits like
        retirement plans and another level of protection from liability;


    5. The profit is not considered income and is therefore not subject to a self-employment tax
        (however, the managing member’s profit is considered income and is subject to the self-
        employment tax);


    6. A managing member can deduct 100% of health insurance premiums paid to the extent of
        their pro-rata share of the LLC’s profit.




Disadvantages


    1. Because an LLC is a relatively new type of business, people are sometimes reluctant to
        enter into a contract with one. They are still not as widely understood as corporations;


    2. Because they are not often used, legal fess will be inevitably higher because lawyers will
        not be as well equipped to handle them;



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    3. Some member’s income is subject to self-employment tax;


    4. Since an LLC is a partnership in the eyes of the IRS, if 50% or more of the capital and
        profit interests are sold within twelve months, the LLC is automatically terminated;


    5. Some states do not tax partnerships, but will tax an LLC;


    6. In order to be treated as a partnership, the LLC must have at least two members.
        Although some states allow for a one-member LLC, the business will not be allowed to
        elect for partnership classification. The business would have to file a Schedule C as a
        sole proprietorship unless it elects to file as a corporation.




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DOCUMENT INFO
Description: This is a step-by-step guide on how to form a Limited Liability Company ("LLC"). LLCs are often the most beneficial classification for business entities because they provide for the limited liability of corporations while having the benefits of partnership taxation. In order for the LLC to be valid, they must have an operating agreement and must file the Articles of Organization with the Secretary of State. This step-by-step guide on how to form an LLC is ideal for small businesses that want to operate as an LLC.
This document is also part of a package LLC Operating Agreement Starter Kit 14 Documents Included