Free LLC Guide

Learn how to start your Limited Liability Company (LLC) the right way! Whether you want to learn how to start your LLC yourself or hire us to form your LLC for you, you’ll find the easiest path forward with our pro tips and choices all outlined below.

What is a Limited Liability Company (LLC)?

An LLC, or Limited Liability Company, is a business structure that offers flexibility in management and taxation, similar to a corporation. It is formed at the state level and provides limited liability protection to its owners, meaning that the debts and assets of the business are separate from the personal assets of the owners. If the LLC is sued, the damages are typically limited to the assets of the business rather than those of the individual owners.

The owners of a Limited Liability Company (LLC) are referred to as “members.” Most states permit “single-member” LLCs, those having only one owner. So an LLC can have only one owner, known as a single-member LLC, or can have multiple owners, known as a multi-member LLC. Most states also do not restrict ownership, so these members can be individuals, corporations, other LLCs, or foreign entities, and there is no limit to the number of members that an LLC can have. So it is important to note that the term “member” does not necessarily refer to a person, as an LLC can also be owned by a business entity such as another LLC or corporation.

The LLC is created by a filing form (called an LLC Articles of Organization) typically with your state’s Secretary of State office, or similar government agency, and paying a one-time filing fee.

The formation date of an LLC refers to the date on which the LLC was legally established and registered with the state in which it is located. The consequences of the formation date of an LLC can vary, but may have some potential implications in certain states such as Delaware.

History Of The LLC

The Limited Liability Company (LLC) was first introduced in the United States in the state of Wyoming in 1977. It quickly gained popularity and revolutionized the way businesses operate in the U.S.A. Although Delaware is often associated with LLCs, it was actually Wyoming that was the birthplace of this type of business entity.

The LLC was officially established in Wyoming in 1977. The State of Delaware didn’t offer LLCs until 1991.

Prior to the creation of the LLC, business owners had two main options for organizing their businesses: a sole proprietorship or a corporation. A sole proprietorship offered simplicity and flexibility, but the owner was personally liable for all business debts and obligations. A corporation offered limited liability for its owners (also known as shareholders), but it was a more complex and expensive structure to set up and maintain.

The LLC was designed to provide the best of both worlds: the simplicity and flexibility of a sole proprietorship with the liability protection of a corporation. In an LLC, the owners (called “members”) are not personally liable for the debts and obligations of the business. This means that if the LLC is sued or incurs debt, the members’ personal assets (such as their homes, cars, and savings) are generally not at risk.

LLCs have become a popular choice for small businesses in the United States because they offer a relatively simple and flexible structure with the added benefit of limited liability protection. Today, LLCs are recognized in all 50 states and the District of Columbia, and they are used by a wide range of businesses, from small startups to large enterprises.

The Effective Date of Formation for an LLC

The formation date of an LLC refers to the date on which the LLC was legally established and registered with the state in which it is located. The consequences of the formation date of an LLC can vary, but some potential implications may include:

1. Tax implications: The formation date of an LLC may affect the tax year in which the LLC is required to file its taxes.
2. Liability protection: The formation date of an LLC may determine the point at which the LLC is legally protected from liability for the actions of the business.
3. Duration of the LLC: The formation date of an LLC may affect the duration of the LLC, as some states have rules regarding the minimum length of time an LLC must be in existence before it can be dissolved.
4. Transfer of ownership: The formation date of an LLC may be relevant in the event of a transfer of ownership, as the length of time the LLC has been in existence may affect the value of the business.

On our Delaware LLC formation forms, there is an “Effective Date of Formation” field for the date that the LLC was formed. In the state of Delaware, for an LLC, you can enter an effective date up to 180 days in the future for this field. The date of submission to the state will be the filing date, but the LLC’s formation will not be considered official until the effective date.

In Wyoming, the effective date of formation for an LLC does not have the same implications as it does in Delaware. In Wyoming, annual reports for corporations and LLCs are due on the first day of the anniversary month of the entity’s formation. For example, if an LLC’s initial filing date is December 30th, its annual report will be due on December 1st every year.

It is important for LLC owners to be aware of the potential consequences of the formation date of their LLC and to consult with a legal or financial professional if they have any questions or concerns.

How an LLC Pays Taxes?

Limited Liability Companies (LLCs) are considered a type of pass-through tax entity, which means that the LLC itself is not taxed on its income. Instead, the profits and losses of the LLC are passed through to the individual members, who report their share of the LLC’s income on their personal tax returns. This is known as “pass-through taxation.”

LLCs have the option to be taxed as a sole proprietorship, partnership, or corporation, depending on the number of members and how the LLC is structured. Single-member LLCs are taxed as sole proprietorships by default, unless the owner chooses to be taxed as a corporation. Multi-member LLCs are taxed as partnerships by default, unless the LLC elects to be taxed as a corporation.

LLC TAX Classifications: Depending on elections made by the LLC and the number of members, the IRS will treat an LLC as either a corporation, partnership, or as part of the LLC’s owner’s tax return (a “disregarded entity”). Specifically, a domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a corporation. For income tax purposes, an LLC with only one member is treated as an entity disregarded as separate from its owner, unless it files Form 8832 and elects to be treated as a corporation. However, for purposes of employment tax and certain excise taxes, an LLC with only one member is still considered a separate entity.

Effective Date of Election: An LLC that does not want to accept its default federal tax classification, or that wishes to change its classification, uses Form 8832, Entity Classification Election (PDF), to elect how it will be classified for federal tax purposes. Generally, an election specifying an LLC’s classification cannot take effect more than 75 days prior to the date the election is filed, nor can it take effect later than 12 months after the date the election is filed. An LLC may be eligible for late election relief in certain circumstances. See About Form 8832, Entity Classification Election for more information.

Limited Liability Company (LLC) – IRS.GOV

In some cases, LLCs may be required to pay state and local taxes, such as sales tax, property tax, and employment taxes. It’s important for LLCs to understand their tax obligations and to file and pay taxes correctly to avoid penalties and fines.

Limited Liability

The LLC offers limited liability protection to its owners, similar to a corporation. This type of company is denoted by the initials “LLC,” which stand for “Limited Liability Company”. This means the business and all its liabilities are considered to be legally separate from its owners. Any business debts or assets belong to the business. This personal liability protection aspect of LLC is much different from a general partnership or sole proprietorship, where there’s no legal separation between the business and its owners.

Limited liability is one of the primary benefits of forming a Limited Liability Company (LLC). It means that the members of the LLC are generally not personally liable for the debts and obligations of the LLC. This is in contrast to a sole proprietorship or partnership, where the owner(s) are personally liable for all debts and obligations of the business.

In an LLC, the members’ personal assets, such as their homes, cars, and savings, are generally protected from the claims of creditors and other third parties.

A creditor cannot go after your personal assets

If the LLC is sued or incurs debt, the creditors can only pursue the assets of the LLC, not the personal assets of the members.

However, it is important to note that limited liability is not absolute for LLC members. In certain situations, such as when an LLC member personally guarantees a debt or engages in illegal or fraudulent activities, they may be held personally liable. Additionally, if proper corporate formalities are not followed and the LLC is not maintained as a separate entity, a creditor’s attorney(s) may be able to pierce the shield of the LLC, resulting in personal liability for the member. To ensure the protection of limited liability, it is essential for LLC members to follow the rules established by their state and to have a solid operating agreement in place.

LLC Operating Agreement

An LLC operating agreement is a legally binding document that outlines the terms and conditions under which an LLC will operate. It is a crucial document that establishes the rights, duties, and responsibilities of the LLC’s members, as well as the management and ownership structure of the LLC.

The operating agreement typically covers a wide range of topics, including the purpose and objectives of the LLC, the management and decision-making process, the distribution of profits and losses, the admission and withdrawal of members, and the dissolution and winding up of the LLC.

An LLC operating agreement is not required by law in all states, but it is highly recommended for all LLCs, especially multi-member LLCs. Having a written operating agreement can help prevent disputes and misunderstandings among the members, and can provide a clear roadmap for how the LLC will be run. It can also protect the LLC’s limited liability status and provide evidence of the LLC’s existence in case of legal challenges.

Single Member LLCs: For single member LLCs, the operating agreement is simply an agreement between the owner and themselves. However, we include a transfer on death provision in the agreement to ensure that the company will be transferred to the designated party upon the owner’s death. If no one is named, the company may be dissolved or go through probate upon the owner’s death.

Multi Member LLCs: For multi-member LLCs, the operating agreement serves several purposes, including defining ownership percentages, outlining the responsibilities of managers, acting as a non-disclosure agreement, and preventing shareholders from selling to outsiders. Without a signed operating agreement, there may be confusion and disputes among the members.

It may be tempting to view an LLC’s operating agreement as a bureaucratic inconvenience, but we believe that doing so may not be in your best interest and could have consequences in the future.

As part of your new company formation documents, we include a free copy of an operating agreement. Regardless of whether you have one or multiple members, we recommend completing the operating agreement as soon as possible.