Limited Liability Companies

Should I form a Limited Liability Company (LLC)?

The primary reason for establishing Limited Liability Companies is for protection from personal exposure to litigation arising from the operation of your trade or business. To determine if an LLC is the appropriate entity for your business you should consider many variables such as ownership, taxes and how you would like to allocate and distribute profits and losses. These decisions are usually best suited to be conducted with a Certified Public Accountant and/or an attorney. Monfalcone & Garris can help you determine if an LLC is a viable choice for your next business venture.

How is an LLC taxed?

An LLC is a creation of state law and, thus, not a separate tax entity, such as a partnership or corporation. An LLC defaults to being taxed as a partnership unless an election is filed with the IRS to be taxed as an S corporation or C corporation. Absent an S or C corporation election, the LLC must file a Form 1065 (U.S. Return of Partnership Income) to report its profits and losses. The members (owners) receive a Form K-1 from the partnership detailing their pro-rata share of profits, losses and other tax attributes which are ultimately reported at the individual level. If the LLC has only one member it is considered a disregarded entity for tax purposes and is treated as a sole proprietorship which files a Schedule C attached to the individual’s Form 1040.

What is an Operating Agreement?

An operating agreement is an understanding among members of an LLC regarding their rights and duties, ownership and allocation of profits and losses. It should also detail procedures to be followed for departing members, admitting new members and other various issues applicable to the operation of the company. The Operating Agreement can be amended by the LLC members at any time.

How do I form a Limited Liability Company (LLC)?

The rules for forming an LLC vary from state to state. All new LLCs must file articles of organization with their secretary of state’s office. It is often recommended (especially for multi-member LLCs) that you draft an operating agreement which lists out the business arrangement, members’ percentage ownership, roles, rights and responsibilities. You are not required to hire a lawyer to set up an LLC but it is highly recommended to engage an attorney to assist with the operating agreement and articles of organization to be sure your interests are protected and the LLC is properly established. Some states charge annual fees and taxes so be sure to consult your attorney regarding these potential expenses or review the applicable state secretary website.

How do I determine if the business name I want to use is available?

The first step you should take in determining whether or not your potential business name is already taken is to check with your local county clerk’s office and with your Secretary of State’s office which approves business entity filings. In addition, you may also want to do a trademark search. You can check the Trademark Electronic Search System and/or engage an intellectual property attorney to perform a proper trademark search.