LLC Basics

Setting It Up

To set up an LLC, you must file articles of organization with the secretary of state in the state where you intend to do business. Some states also require you to file an operating agreement, which is similar to a partnership agreement.

Before deciding upon an LLC, remember to check with your lawyer or accountant about the advantages of the LLC in your particular state. Ask up front what it would cost to form a corporation versus the cost of forming an LLC. You may be surprised to learn that in some states an LLC could be established by filing a simple, one-page document, which lays out the Articles of Organization of your LLC, with the secretary of state.

You can form an LLC for any lawful business as long as the nature of the business is not banking, insurance, and certain professional service operations, such as doctor, lawyers or accountants. By simply filing articles of organization with the respective state agency, an LLC takes on a separate identity. Similar to a corporation, but without the tax problems of the corporation, it will be taxed like a partnership.

Also, you'll need two people (members) to meet the state requirement in many states and to meet the basic federal tax law requirements to obtain the flow-through tax provisions that are one of the advantages of an LLC.

The cost of setting up an LLC is roughly equivalent to setting up a corporation. The secretary of state's fees for filing articles of organization and for filing annual reports are often the same for both LLCs and corporations. Entrepreneurs who wish to seek help in organizing an LLC through an LLC formation service or through an attorney will find the fees to be roughly the same.

Even after you settle on a business structure, remember that the circumstances that make one type of business organization favorable are always subject to changes in the laws. It makes sense to reassess your form of business from time to time to make sure you are using the one that provides the most benefits.

Outgrowing Your Business Structure

What should the owners of an LLC do if their company grows in size such that an LLC is no longer the appropriate business form? The answer is simple: it is possible to convert an LLC into a corporation. Thus, some small companies begin life as LLCs, outgrow the LLC form, and then the LLC's owners transfer the assets of the LLC to a newly formed corporation with the same owners as the LLC.

As one might imagine, it is also possible to convert a corporation into an LLC, or nearly any business form into any other. It is also possible to reorganize a business in another state by transferring the assets of a business into a newly chartered entity. Converting business forms does require some sophisticated legal and tax analysis and should not be attempted without the services of a qualified attorney and accountant.

This article was excerpted from the books Start Your Own Business and Entrepreneur Magazine's Ultimate Book on Forming Corporations, LLC's, Sole Proprietorships and Partnerships, and the article "Pros and Cons of the LLC Model" by David Meier.

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