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 Business Entity Formation

The limited liability company (LLC) is the fastest growing form of business in the U.S.

The LLC Form of Business

The limited liability company form of business provides insulation to the owners of the company from creditors just as incorporating does. Also, LLC formation is similar to incorporation in that Articles are filed with a regulatory office of the state.

Much comparison is drawn between the limited liability company and corporate entities, but, the LLC is more similar to a partnership than a corporation.

Management flexibility, asset protection and a simplified taxed structure make LLC entities the fastest growing form of doing business in the United States. Key aspects include limited personal liability of owners from creditors, simplified management as opposed to a corporation and a tax structure which avoids double taxation. Members of an LLC (owners) pay taxes on the income, yet have the advantage of limited liability as the shareholders of a corporation do.

Composition and Management of Limited Liability Companies

Basically, an LLC is a combination of the partnership and corporate form of business. However, running a Limited Liability Company is easier than operating a corporation.

One or more members (owners) can generally manage the business and avoid the burdensome paperwork requirements that are found in operating a corporation. An LLC can consist of one or more members who may actively manage the business of the company or designate other persons to do so. Arizona, California and Nevada all allow for single member LLCs.

Members can distribute profits and losses in any manner they wish, regardless of their percentage of ownership. Example: profits of the business could be allocated to two owners on a fifty-fifty (50% / 50%) basis, even though one of the owners controls 10% management rights over the company. With corporations, this type of income distribution is generally not possible.

Forming an LLC gives its owners numerous options in determining who manages the company and what their particular duties will be.

Organizational Documents

To form an LLC in Arizona, California or Nevada, you start by filing Articles of Organization. This organizational document contains basic information about the framework of the company (who and where the principals are and why the company is formed (its purpose). Generally, the name and address of the company, its members, managers (if any) and the agent to accept notice on behalf of the company are disclosed. Arizona has an additional requirement that the Articles be published in a legal newspaper.

An Operating Agreement should be prepared to outline the respective rights and duties of the members and managers. A Limited Liability Company Operating Agreement is analogous to corporate bylaws, or a partnership agreement in a partnership business structure. The LLC Operating Agreement should outline the management structure of the business, how profits and losses will be allocated, and what the members’ capital contributions and voting powers are.

Perpetual Existence (Duration) of the LLC Form

In the past, the time duration for existence of an LLC was restricted under most states laws, but recently almost every state, (including Nevada Arizona and California), allow a limited liability company to exist perpetually, unless otherwise stated in the LLC’s Articles of Organization.

Continuing Operations

To maintain limited liability characteristics of the company, an LLC must be properly formed and operated. Legal requirements exist for forming and operating companies. The rules vary by state jurisdiction, but all states are becoming more uniform in governing the LLC form of business.

The company must maintain a records book where the Articles of Organization and Operating Agreement are kept. Records of meetings of members and managers should also be maintained to preserve the legal integrity of the company. In the event a creditor attempts to hold an owner personally liable, the records book should support the legitimacy of the business.

A limited liability company, unlike a corporation, is not subject to double taxation (unless the members elect to be taxed as a corporation). Profits and losses of the business are passed through to the individual owners, in the same manner as with a partnership or proprietorship. The Internal Revenue Service classifies a Limited Liability Company as a “pass-through entity”. Income from the LLC is passed through to each member, and each single member reports their share of the profits on their income tax return.

For specific information to form an LLC and the rules in your State, please refer to the correlating pages to form your LLC:

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