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Form Your Limited Liability Company (LLC)

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Articles of organization must be filed with the appropriate state to form an LLC. While an operating agreement does not have to be filed, it is an important document that should set forth the members’ rights and responsibilities, their share of ownership, their voting rights, their shares of profits and losses and their distribution rights, all of which can be different and without regard to their capital contribution.

One or more managers make management decisions and “run the business” for the inactive members.

As its name implies, an LLC provides the same limited liability for its members as does a corporation. Members enjoy limited liability for the debts, obligations and liabilities incurred by the business as well as liability stemming from possible legal action. Normally, members cannot lose more than the amount they invested in the LLC. If the LLC goes bankrupt, the members will not be liable for its debts. Should someone sue the LLC and it is found liable, they can take the LLC’s property to satisfy the judgment but if that property does not satisfy the judgment, they will not be able to take a member’s personal assets, i.e. home, car, a bank account. Protection of members’ personal assets is a major advantage of an LLC. An exception to a member’s limited liability happens when the corporation has recklessly harmed people or has been used to perpetuate a fraud.

LLC Taxation

An LLC can choose to be taxed as a corporation or choose the pass through tax structure of proprietorships, partnerships and S Corporations. And the distribution of profits and losses can differ from members’ share of ownership. While an LLC and an S Corporation are essentially alike, an LLC is much more flexible and is easier and less complicated to operate than a corporation.

Why Form an LLC?

For those who want the same limited liability as a corporation but without the formal structure and more cumbersome ongoing requirements, an LLC’s flexibility and simplicity offer a distinct advantage over a corporation. An S Corporation does, however, offer the advantage of allowing owners to minimize self employment taxes.

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Some Points to Consider When Forming an LLC

  • Official documents, typically called a Certificate of Formation or Articles of Organization, must be filed with the appropriate state in order to form an LLC Corporation and state filing fees must be paid
  • Most states permit LLC’s to also file an operating agreement, allowing for great flexibility, setting forth the relationships between its members and its internal operation
  • An LLC is considered by the law to be an individual entity separate from its members and managers
  • An LLC can generally conduct any lawful business
  • Most state statutes do not require any meetings of LLC members
  • There are fewer required formal reports and less paperwork for LLC’s than for corporations

    Limited Liability
  • Members and managers normally enjoy the same limited liability as do the shareholders, directors and officers of a corporation and can lose no more than the amount of their contribution to the LLC
  • Protection of members’ personal assets is a major advantage of an LLC
  • As with corporations, members and managers can be held liable when the LLC has been used to recklessly harmed people or perpetuate a fraud

    Taxation
  • An LLC can choose to be taxed as a corporation or choose the pass through tax structure of proprietorships, partnerships and S Corporations

    Members & Employees
  • Members of an LLC can be divided into as many classes as desired, regardless of their capital contribution and each class can have different voting rights, different shares of profits and losses, and different distribution rights
  • Employees would frequently rather work for an LLC than for a sole proprietorship or partnership
  • An LLC can be managed by its members or by managers
  • Most states permit the free transferability of LLC interests
  • While most states permit an LLC to have perpetual duration, some do not, setting forth the events which would terminate the LLC
  • Most states permit 1 member LLC’s while none limits the number of members
  • Corporations, partnerships and trusts can be members of an LLC

    Public Perception
  • The general public normally thinks of LLC’s as being more substantial than sole proprietorships and partnerships

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