We live in a society where lawsuits are a fact of life, so it's prudent to protect yourself, your home, and your treasured belongings against someone going after your personal possessions and resources. As with corporations, a limited liability company (LLC) can limit your personal financial liability, protecting you from undue exposure.
With an LLC, you have the option of being taxed as a corporation or a partnership. Additionally, record-keeping and accounting are made easier by having a separate entity.
Legal Ace makes the process of forming an LLC quick, easy, and secure. We will guide you through a questionnaire, and then do the rest of the work for you -- quickly and efficiently.
I absolutely loved working with LegalACE to establish my LLC.
The entire process was very easy
to follow and far more user
friendly than some of the other
sites I looked into.
~ Jackie W. - Chandler, Arizona
All About LLC Formations
LegalACE education center provides you with the information and resources you need when
considering a LLC Formation. The LLC Formation Guide provides general information about LLC Formation, and the FAQs answer some of the most common questions people ask. This information
allows you to make informed decisions.
Limited Liability Companies or LLCs represent the business formation of choice for many looking
to carve out their piece of the American dream. These business formations offer the limited legal liability of a corporation with the simplicity and
flexibility of a partnership; that's why they are seen as hybrids of the two.
Like sole proprietorship or partnerships, LLCs may offer pass-through taxes, in which the owners
report the profits or losses on their personal tax returns. Due to their relative simplicity compared
with corporations, LLCs tend to be popular among companies with a single owner.
Limited Liability - With a sole proprietorship, the owners are personally liable for any debts and other obligations the
business incurs, and as a result, their personal assets are vulnerable. With an LLC, the owners
are not only protected from business debts, but also from legal liability, such as lawsuits against
the company.
No Double Taxation - LLCs have the option of being taxed
as a corporation or a partnership, depending on how they are
set up. LLCs can be set up to mimic the tax treatment of S
Corporations, in that earnings and losses flow through the
business to the owners, who then pay taxes on the earnings
through their personal income tax. Or they can be set up like a
corporation and taxed separately.
Tax Deductibility - Business owners will want to deduct as much of their expenses as possible, thereby reducing their overall tax payments. Why pay more taxes than necessary? The IRS specifically allows the deduction of reasonable and necessary business expenses. Many taxpayers overlook legitimate deductions for business expenses. To the extent possible, LLC owners will want to deduct the following types of business expenses: Vehicle expenses, travel expenses, start-up and organizational costs, entertainment expenses, legal fees, rent, materials and supplies, interest expense and bank charges, state local and sales taxes, salaries and other compensation for personal services, insurance, and advertising costs.
Piercing the Corporate Veil - Corporations and LLCs enjoy a veil of protection against law
suits and confiscation of personal assets to satisfy business debts, among other things. That
protection, however, is bestowed only to those businesses that can meet the criteria. In other
words, businesses cannot simply pose as corporations, go through the motions, and enjoy the
rewards of the business formation; they must look, act, feel and operate as limited liability
companies and corporations.
Corporations and LLCs must follow many rules on the road to the "veil of protection." Once the
owners start to slip, treating the business like a sole proprietor, mixing corporate and personal
funds, for example, they run the serious risk of losing its corporate status - or piercing the
corporate veil.
Here are some examples of behavior that has brought about civil cases against businesses that
are merely posing as LLCs and corporations - also called shell corporations:
Not filing or filing inaccurate corporate records;
Dishonesty or misrepresenting members;
Not maintaining arm's length relationships with related entities;
Not observing corporate formalities in terms of behavior and documentation;
Failure to pay dividends;
Intermingling assets from the corporation and the shareholder.
So, taking the step to creating a corporation or an LLC should not be taken lightly; it's a serious
endeavor with serious responsibilities. But with all great responsibilities come great rewards.
Creating your own LLC enables you to enjoy the benefits of owning a corporation along with the
simplicity of operating as a partnership. Having those LLC documents prepared by LegalACE
means you are receiving the best deal for your dollar and the most comprehensive customer support
in the industry.
An LLC, or Limited Liability Company, is a legal business structure which limits the personal liability of its owners for the debts and actions of the LLC. While an LLC is a unique business structure, it shares certain characteristics common to corporations, sole proprietorships, and partnerships. LLCs provide the owner(s) with multiple benefits, such as management flexibility and pass through taxation, while retaining the full limited liability previously enjoyed only by corporations. If you are interested in forming a business, an LLC may be the most efficient, affordable, and secure choice.
An LLC may have one or more owners, who are referred to as members. Initially some states required LLCs to have more then one owner. Now many states allow a single owner to acquire an LLC. Since most states do not restrict ownership, members may include individuals, corporations, other LLCs, and foreign entities. There is no maximum number of members for an LLC.
The LLC functions best as a small business, requiring less organization and oversight than a large corporation. As a separate legal entity, the LLC must have its own bank account through which all income and expenses must flow. The LLC conducts all business in its name, and its members act as authorized agents on behalf of the company. Just as shareholders of a corporation are insulated from liabilities of the corporation, LLC members are protected from liabilities of the company.
An LLC has qualities similar to those of C and S Corps. It is important to understand the difference between the various kinds of corporate entities as illustrated below:
Administration Requirements
. LLC - Relatively few requirements.
. C Corp - Election of board of directors/officers, annual meetings, and annual report filing requirements.
. S Corp - Election of board of directors/officers, annual meetings, and annual report filing requirements.
Management
. LLC - Members can set up structure as they choose.
. C Corp - Shareholders elect directors who manage business activities.
. S Corp - Shareholders elect directors who manage business activities.
Term
. LLC - Perpetual, unless state requires fixed amount of time.
. C Corp - Perpetual: can extend past death or withdrawal of shareholders.
. S Corp - Perpetual: can extend past death or withdrawal of shareholders.
Double Taxation
. LLC - No
. C Corp - Yes, taxed at corporate level and then again if distributed to shareholders in the form of dividends.
. S Corp - No
Pass Through Tax Treatment
. LLC - Yes
. C Corp - No
. S Corp - Yes
Ownership Rules
. LLC - Unlimited number of members allowed.
. C Corp - Unlimited number of shareholders; no limit on stock classes.
. S Corp - Up to 100 shareholders; only one class of stock allowed.
Ease of Operation
. LLC - Easy, some states may require more than others.
. C Corp - Must have annual meetings, Board of Directors meetings, corporate minutes, and stockholder meetings.
. S Corp - Must have annual meetings, Board of Directors meetings, corporate minutes, and stockholder meetings.
The 3 main advantages of an LLC are limited liability, taxation, and management flexibility.
Limited Liability
. Limited liability - The owners of the LLC, called "members," are protected from personal liability for acts and business debts of the LLC. With a sole proprietorship, or partnership, the owners are personally liable for any debts and other obligations the business incurs. As a result, their personal assets are vulnerable. With an LLC the owners are not only protected from business debts, but also from losing their personal assets dues to litigation.
Taxation: No Double Taxation, flow-through tax advantages, tax deductibility
. Pass-through taxation - Under the default tax classification, profits are taxed at the member level, not at the LLC level (i.e., no double taxation). LLCs have the option of being taxed as a corporation or as a partnership, depending on how they are structured. LLCs can be set up to mimic the tax treatment of S Corporations, in that earnings and losses flow through the business to the owners, who then pay taxes on the earnings through their personal income tax. LLCs can also be set up like C corporations and be taxed separately.
. Tax Deductibility - Business owners will want to deduct as much of their expenses as possible, thereby reducing their overall tax payments. The IRS specifically allows the deduction of reasonable and necessary business expenses. Many taxpayers overlook legitimate deductions for business expenses. To the extent possible, LLC owners will want to deduct the following types of business expenses: Vehicle expenses, travel expenses, start-up and organizational costs, entertainment expenses, legal fees, rent, materials and supplies, interest expense and bank charges, state local and sales taxes, salaries and other compensation for personal services, insurance, and advertising costs.
Management flexibility
. Simplicity of operation with much less administrative paperwork and recordkeeping.
. LLCs are enduring legal business entities, with lives that extend beyond the illness or even death of their owner(s), thus avoiding problematic business termination or sole proprietor death.
. No loss of power to a board of directors (although an operating agreement may provide for centralization of management power in a board or similar body).
. Flexible distribution of profits and losses.
. Membership interests of LLCs can be assigned, and the economic benefits of those interests can be separated and assigned, providing the assignee with the economic benefits of distributions of profits/losses (like a partnership), without transferring the title to the membership interest (i.e., See VA and Delaware LLC Acts).
No. Limited liability is not absolute, for either LLC's or corporations. If an LLC owner engages in illegal or intentional misconduct they can be held personally liable. Below are some examples of instances in which an LLC owner could be held liable:
. 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.
If the owner of an LLC treats the company as an extension of his or her personal affairs he or she risks the existence of the LLC. A court can rule that an LLC is non-existent if the owners seem to be conducting business as individuals. The owners then become liable for their debts and actions. Often referred to as "piercing the corporate veil," an LLC or corporation can be stripped of its status as a legal business entity if it fails to meet certain requirements.
Although the requirements are similar, there is generally more administration overhead required for a corporation than for an LLC. For example, corporations must have board elections, keep corporate minutes, hold annual meetings, and report filings. While LLC's are required to file certain documents and keep proper records, they generally require less paperwork.
No. Insurance can be of great benefit; however, it is not a substitute for limited liability. Insurance does not protect against all risk. There is often a limit to the amount insurance will cover, and there are many third party claims that may not be covered. Insurance should be viewed as something to complement a proper business structure, not replace it.
It is not always advantageous to form an out-of-state LLC. Some business owners choose to form an out-of-state company in order to maintain anonymity. Often out-of-state LLCs are formed as a method of avoiding state income taxes. Regardless of where the business is formed, you are required to pay the state income taxes of the state in which the business is located. Sometimes a business owner will have to pay fees in both the state of incorporation as well as the state of the business. For this reason, forming an out-of-state entity can lead to double costs.
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