- What is an LLC?
- What Terms do I Need to be Familiar with in Regard to LLCs?
- What are the Articles of Organization?
- What is a Member?
- What is a Managing Member?
- What is a Manager?
- What is an Operating Agreement?
- What should be included in an Operating Agreement?
- What is a Registered Agent?
- What is a Fictitious Business Name?
- How Long does it Take to Form an LLC?
- How is an LLC Owned?
ADVANTAGES AND DISADVANTAGES OF LLCs
- What Benefits do LLCs have over Corporations?
- Does an LLC Protect its Owner from Liability?
- Are their Limitations to an LLC’s Protection of Its Owners?
- Does an LLC Protect its Members from Liability Arising Out of Their Own Negligence or Intentional Acts?
- How Do You Avoid Losing the Personal Liability Protections Afforded to Members by an LLC?
STARTING YOUR LLC
- How Do I Start an LLC?
- Where Should I File my LLC?
- Should I Check to See if the Name of my LLC is available Prior to Filing to Organize the Same?
- What Must be Included in the Name of my LLC?
- Are there Different Types of LLCs?
- What is a Domestic versus a Foreign LLC?
- What are Member-Managed and Manager-Managed LLCs?
- What are Single Member and Multiple-Member LLCs?
- What is a PLLC?
TAXES AND OTHER LEGAL CONSIDERATIONS
- How is an LLC Taxed?
- Are there any Tax Benefits to Forming a Single-Member LLC?
- What is an Tax Entity Election and how does it apply to an LLC?
- Does an LLC have to pay State Taxes?
- What Laws Must an LLC Comply with Concerning its Employees?
- Does an LLC Need a Bank Account?
- What Licenses does an LLC Require?
RUNNING YOUR LLC
- What are the Day-to-Day Activities Required to Run an LLC?
- What Records are my LLC Required to Keep?
- Is an LLC Required to Conduct Regular Member Meetings?
- Are there Any Limitations on Salaries for an LLC?
- Can an LLC Distribute Profits to its Members?
- Can I Take a Personal Loan from the LLC? Can I Lend Money to My LLC?
MAINTAINING YOUR LLC
AMENDING AN LLC
- Can You Amend an LLC?
- How do I Amend the Articles of Organization?
- How do I Change the Registered Agent of LLC Registered Office Address?
DISSOLVING AN LLC
- How do I Close or Dissolve my LLC?
- What is Administrative Dissolution?
- What Events Require Dissolution of the LLC?
- What are Articles of Dissolution?
- Are there Advantages of Formally Dissolving an LLC?
- Can the LLC Still Conduct Business After it has Filed its Articles of Dissolution?
- What is Judicial Dissolution?
- How are an LLC’s Assets Distributed Upon Dissolution?
- What is the Importance of Defining the LLC’s Capital Structure?
- What are Membership Interests?
- How do I Secure Funding for my LLC?
- What Should I Do when Securing Investments from Friends and Family?
- When Does an Investor get a Share of the Business?
What is an LLC?
Like a corporation, a limited liability company or LLC, is a separate and distinct legal entity. This means that an LLC can get a tax identification number, open a bank account and do business, all under its own name.
What Terms do I Need to be Familiar with in Regard to LLCs?
What are the Articles of Organization?
In most states an LLC is created by the filing of the Articles of Organization with the secretary of state and paying the required state filing fee. Once these articles are filed and approved, the LLC becomes a legal business entity.
The Articles of Organization outline basic details about your company. States have different requirements for what information is required to form an LLC, but generally you will need the following:
• The exact name of the LLC you are starting;
• A description of company’s business;
• The mailing address where the principle place of business will be located (Of note, this can be a P.O. box in many states);
• The name and address of the Registered Agent; and
• Basic information about the LLC’s Members, Managers, and Officers.
Once filed, the secretary of state will review the articles. If everything in the articles is acceptable, the LLC is formed. If there are minor procedural issues with the articles (e.g., the articles are missing required information), the articles may be rejected subject to correcting the minor issue outlined by the secretary of state. However, if the articles are rejected because of an issue with the LLC’s proposed name (i.e., the name is already in use by another LLC) another name will need to be selected for your LLC.
What is a Member?
What is a Managing Member?
What is a Manager?
What is an Operating Agreement?
As mentioned elsewhere, an LLC must decide if it will be managed by all the members or by a limited number of managers. In this regard, it is important to have a written agreement known as an Operating Agreement spelling out the rights and duties of the members and managers, if any. This is also a good document in which to include other rules governing the LLC. Even if an LLC has only one member, a membership agreement should be signed to formalize the LLC and make it clear that the member is not personally liable for the debts of the business.
LLCs that do not follow procedures can have their veil pierced (meaning the owners can be liable). Therefore, it is important to set up procedures to formalize the company and distinguish it from its owners. Of course, if you set up procedures and do not follow them, a court could use that as a reason to impose liability.
What should be included in an Operating Agreement?
The functionality of internal operations of the LLC should be outlined in the Operating Agreement including:
• Percentage of members’ ownership;
• Voting rights and responsibilities;
• Powers and duties of members and managers;
• Distribution of profits and loses;
• Holding meetings; and
• Buyout and buy-sell rules (procedures for transferring interest when members chose or in the event of a death).
What is a Registered Agent?
The Registered Agent (in some states referred to as the resident agent) is the person designated by the LLC to receive legal papers that may be served on the LLC. The registered agent should be regularly available at the registered office of the LLC. The registered office can be the LLC’s office, the office of the LLC’s attorney, or the office of the registered agent.
Typically, a registered agent is:
• A member of the LLC; or
• Another entity established in the state of incorporation (commonly referred to as a domestic entity) that can serve as a Registered Agent for LLCs.
What is a Fictitious Business Name?
Fictitious Business Names are names registered by businesses that are not the name of the company itself.
Most LLCs do not need a fictitious name. Your LLC’s name may be your business name. Some examples of when a fictitious name may be used include:
• If a person who names his or her company something like Henry Jones, LLC, he or she might want to use the fictitious name, Jones Antiquities.
• If the company has a common name like Smith Wallpaper, LLC, it might want to add a location and use a fictitious name such as Smith Wallpaper of New York.
How Long does it Take to Form an LLC?
Depending on the respective secretary of state office, it may take several weeks to get a response. However, most states offer an expedited option for an additional fee that reduces this time to a matter of a few days.
How is an LLC Owned?
LLC ownership can be expressed either (1) by percentage or (2) by membership units which are similar to shares of stock in a corporation. In either case, ownership confers the right to vote and the right to share in profits.
Of note, unlike a corporation an LLC can distribute its ownership interests as it sees fit without regard to how much capital a member contributes to the LLC. For example, if Person A contributes $5,000 to the company and Person B contributes no money but runs the day-to-day operations of the company they could still decide to split the membership interests 50%-50%.
An LLC can also be organized with different classes of ownership interests which provide flexibility for special allocations of profits and voting power. For example, you could create a special class of “super-voting” units that provide 10 votes per unit or pay a certain level of profit before the “regular” units.
It is critical to note that the sale of membership interests in an LLC may be subject to federal and state securities laws. Generally, though, if you are not advertising the sale and are dealing only with a small number of investors (less than 35), then you will be exempt from most of the regulations. If, however, you are seeking to raise a significant amount of money from a large number of investors, you may want to consult an attorney.
ADVANTAGES AND DISADVANTAGES OF LLCs
What Benefits do LLCs have over Corporations?
Generally, LLCs are more flexible and simple to maintain than corporations. LLCs are not bound by the same rigid rules of corporations. With an LLC, there’s no requirement for special meetings, extensive corporate records, or many other formalities. LLCs are even flexible when it comes to taxes, offering lots of options so you can create a tax plan that works for you.
Does an LLC Protect its Owner from Liability?
Yes. One of the primary advantages of an LLC is that its owners, called members, have “limited liability.” This means that, under most circumstances, they are not personally liable for the debts and liabilities of the LLC.
Example: If an LLC files for bankruptcy the members usually are not required to pay the LLC’s debts with their own money. If the assets of the LLC are not enough to the debts and liabilities, the creditors generally cannot look to the owners for payment. Their debt was with the LLC, not the people that owned the LLC.
Additionally, with an LLC you get an additional type of asset protection not afforded to corporations. Under most state’s laws, if you do something personally that makes you liable (e.g., you cause an auto accident and owe a lot of money), the creditor cannot take your LLC assets away from you. The law generally says that your creditor can only get a charging order against your interest. This means that he or she cannot take ownership of your interest in the LLC or liquidate the assets of the LLC. Of note, the laws regarding charging orders vary by state and may not apply to single member LLCs.
Are their Limitations to an LLC’s Protection of Its Owners?
Yes. When an LLC is formed, you establish a separate legal entity that is responsible for its own contracts and other obligations. Because the LLC’s members are legally separate from the LLC itself generally they are not personally responsible for the LLC’s debts and other obligations.
This LLC protection, however, is not absolute. There are certain instances where members’ personal assets may be used to satisfy business obligations. For example:
• Members are always liable for their own negligence or intentional actions;
• Members may also be held personally liable if they don’t take steps to maintain the LLC’s status as a separate legal entity; and
• Members’ assets are at risk if they personally guarantee a debt.
Does an LLC Protect its Members from Liability Arising Out of Their Own Negligence or Intentional Acts?
Generally, no. LLC asset protection does not protect an LLC member from his or her own intentional or negligent actions. Those actions can include deliberate acts, such as stealing from a customer, and also things that happen by accident, such as a wreck involving a company car, a customer who slips and falls or the LLC’s premises, or a product that malfunctions and injures someone.
When these things happen, the LLC’s owners can be sued on a theory of negligence or for their intentional acts, meaning they weren’t as careful as they should have been or intentionally performed the act at issue. That, in turn, can put the owners’ personal assets, as well as the assets of the business, at risk.
In that regard, one even if you have an LLC one should always be careful and ethical in all of your dealings. Additionally, LLCs should protect themselves and their members with liability insurance that can pay claims and cover the costs of defending a lawsuit.
How Do You Avoid Losing the Personal Liability Protections Afforded to Members by an LLC?
In addition to the above concerning personal liability, there are certain steps that members of an LLC should take to avoid having the liability protection of their LLC disregarded by a court of law. This may occur when LLC members don’t keep business and personal affairs separate, a creditor could ask a court to rule that the LLC is just an “alter ego” of its members. Under this theory, a court may disregard the LLC as a separate entity and hold the members personally responsible for business obligations.
There are several steps that LLCs can take to prevent this from happening:
• Separate Accounts: LLCs should open a business bank account and keep LLC money completely separate from members’ personal finances.
• Avoid Under Capitalization: The LLC should have sufficient funding to meet its obligations. Under capitalization can be a basis for alter ego liability.
• Operating Agreement: LLCs should also have an Operating Agreement that specifies how the LLC should be operated, and members should follow procedures outlined in the operating agreement.
• Business with the LLC: Everyone the LLC does business with should understand that they are dealing with an LLC. Make sure your contracts are signed on behalf of the LLC and include the LLC designation on written business materials such as forms, invoices, purchase orders, correspondence, business cards, websites and marketing materials.
• Avoid Personal Guarantees: A new LLC that needs to lease office space or incur other debts may lack the assets and good credit history that lenders and landlords require. To get financing, LLC members are then often asked to sign a personal guarantee. If the LLC cannot pay its obligations, a creditor can try to recover money from the members who signed the personal guarantee. Of note, if you are a brand new business owner, there’s probably not much that you can do to avoid personal guarantees. From day one, however, begin to build business assets and a credit history that may allow you to avoid using your personal assets to guarantee business obligations in the future.
STARTING YOUR LLC
How Do I Start an LLC?
Starting an LLC is straightforward. Generally, it simply requires filing an Articles of Organization with the state office charged with handling such matters.
Once you are ready to organize your LLC, chose from one of TTC Business Solutions’ LLC Filing Services to organize your business.
Where Should I File my LLC?
Most people choose to form LLCs in their home state. Typically, saves you money because the LLC will not need to register as a foreign LLC if it does business in its home state.
However, if your home state has high annual LLC fees or income taxes and your LLC does not do business in your state it may be wise to form an LLC elsewhere. Of note, doing business means more than just selling products or making passive investments in that state. It usually requires an office or an active business presence.
Should I Check to See if the Name of my LLC is available Prior to Filing to Organize the Same?
Yes. The very first thing to do prior to starting an LLC is to thoroughly research the name you wish to use in order to be sure it is available. This assist you to avoid potential claims of trademark infringement if you adopt a name too similar to another’s as well as having to rename your LLC after spending thousands of dollars promoting it.
Thus, once you select a name you should have the following research performed:
• Business Name Availability Search; and
• State and Federal Trademark Search.
Additionally, if you intend on performing business internationally you may wish to consider expanding the State and Federal Trademark Search to include international databases as well.
If your name then appears to be available you should file for the LLC and apply to register your trademark on a state or federal level.
What Must be Included in the Name of my LLC?
This varies on a state-by-state basis. Generally, the LLC’s name must contain one of the following at the end of the name:
• Limited Liability Company
In some states, the word, “limited” can be abbreviated “Ltd.” and the word “company” can be abbreviated to “Co.”
Of note, the name cannot include any words implying that it is part of the state or federal government, or that it is a part of any business in which it is not authorized to be.
Are there Different Types of LLCs?
Yes. Limited liability companies are flexible business structures, allowing them to be configured however they are managed, organized, and even where the company is formed. Some LLCs are designed specifically for professional services such as doctors and attorneys typically called PLLCs, others are structured to take advantage of interstate commerce laws.
What is a Domestic versus a Foreign LLC?
A person wishing to form a limited liability company must decide whether the company will be a domestic or a foreign LLC. A foreign LLC is one formed in one state that does business in another. A foreign LLC is subject to both states’ laws, but may benefit from tax laws, or other laws, specific to their state of formation. Delaware has been recognized as being favorable to business.
What are Member-Managed and Manager-Managed LLCs?
One initial decision you will need to make is whether the LLC will be member-managed or manager-managed. Stated in another manner, will all of the members have equal control of the company’s business or will there be one or more people who control the business while the others are mostly silent?
• Member-managed. If the LLC is being formed by one person or a small number of people who will operate as equal partners, consider being a member-managed company.
• Manager-managed. If the LLC will have one or more persons who will make all the business decisions and members who are not active in the business except to put up money consider being a manager-managed LLC.
What are Single Member and Multiple-Member LLCs?
Forming a single-member or multiple-member LLC is not just a function of the number of people involved. Because of the advantages and disadvantages of each, a single business owner might want to form a sometimes a multiple-member company and multiple people might want to form single-member companies. Let’s examine why.
For instance, a person with a one-person business who wants to start a multiple-member LLC to gain asset protection might want to make her spouse, parent, or child a member. However, two people who own several properties as separate LLCs might want to make them single-member LLCs owned by one multiple-member LLC to avoid filing a separate tax return for each.
You should have an operating agreement whether you are a single or multiple-member company. But when setting up a multiple-member company be careful to spell out each others’ rights in the event of a split-up, death, or an irreconcilable disagreement.
What is a PLLC?
A PLLC is an LLC that provides certain types of services provided by a professional. Services such as those performed by attorneys, physicians, certified public accountants, veterinarians, architects, life insurance agents, chiropractors, and similarly licensed businesses must be performed under a PLLC and not an LLC. Of note, unlike a standard LLC only persons licensed to practice the profession may be members of a professional limited liability company.
TAXES AND OTHER LEGAL CONSIDERATIONS
How is an LLC Taxed?
By default, an LLC is taxed as a pass-through entity or disregarded-entity. As such, the LLC’s profits pass through to the members’ personal income for tax purposes.
This differs from a regular C corporation which pays a corporate tax on its net income. Then, when the corporation distributes profits, the stockholders pay income tax on dividends. Thus operating a C corporation can result in what some refer to as a double tax situation.
But an LLC is special in that its owners can choose how it is taxed. As always, it is recommended that you speak with a qualified tax professional concerning how to structure LLC if you have any questions on the same.
Are there any Tax Benefits to Forming a Single-Member LLC?
Yes. A single-member LLC is easier for tax purposes because no federal tax return is required, unless the business decides to be treated as a corporation for tax purposes. The income is reported on the member’s tax return. A multiple member LLC must file tax return, and give the members K-1 forms to file with their returns. As always, however, you should consult a qualified attorney or tax practitioner for specific advice for your situation.
What is an Tax Entity Election and how does it apply to an LLC?
IRS Form 8832 was issued by the IRS to allow LLCs to choose their tax status. It is basically a choice between partnership taxation and corporate taxation. For a single-member LLC, it is a choice between sole proprietorship taxation and corporate taxation.
The difference between the two types of taxation is that sole proprietorships and partnerships are not taxed at all. Corporations, however, are treated like separate taxpayers.
A sole proprietorship or partnership simply reports its income and expenses; whereas the proprietor or partners report the net profit or loss on their personal tax returns.
A corporation files a tax return and pays tax on any profits. If it distributes any of the profits to the members, those profits are taxed again.
One of the benefits of an LLC is that it can avoid double taxation if it opts for corporation taxation and chooses to be taxed as an S corporation. To do this you need to file IRS Form 8832 and Form 2553 within seventy-five days of forming the LLC.
Another way around the double taxation is if all of the profits can be paid to the members as salaries, thus making the profits deductible. The corporation then has no profit on which to pay tax. The problem arises when the company makes more money than would be reasonable to pay as salaries. The IRS can then impose extra corporate taxation on the excess amounts.
Another way around double taxation is for the LLC to opt for corporate taxation and then select S corporation status. To do so, you would file Form 8832 and Form 2553 within seventy-five days of forming your LLC.
Does an LLC have to pay State Taxes?
Check with a qualified tax professional regarding your state’s tax laws for LLCs. Generally, if you will be collecting sales tax or will pay wages subject to unemployment tax, you may need to register with any state in which you sell goods or have employees.
What Laws Must an LLC Comply with Concerning its Employees?
An LLC that has employees other than its members is subject to numerous laws and reporting requirements, which are beyond the scope of this FAQ.
Does an LLC need a Bank Account?
What Licenses does an LLC Require?
Before opening your business, you may need a county business license, and if you will be working within a city, a city business license. Businesses that perform work in several cities, such as landscapers, may need to obtain a license from each city in which they work. This may not have to be done until you actually begin to provide services in a particular city.
County business licenses can often be obtained from the tax collector or in the county courthouse. City licenses are usually available at city hall. Also, make sure to find out if zoning allows your type of business before buying or leasing property because the licensing departments will check the zoning before issuing your license.
RUNNING YOUR LLC
What are the Day-to-Day Activities Required to Run an LLC?
One benefit of an LLC is that it need not comply with some of the required formalities of a corporation. However, although an LLC is not as complicated as a corporation there are still rules you should follow to help protect you from challenges to the liability protections of your LLC.
• Operating Agreement: All LLCs should maintain at least a simple Operating Agreement and comply with the terms in the same;
• Separate Bank Accounts: The LLC’s financial accounts and funds should be kept separate from your personal affairs. Do not regularly make loans to yourself from company funds and do not commingle funds with your personal accounts;
• Minutes: Although not required for an LLC, keeping minutes of meetings is generally a good idea and may assist in keeping the shield against liability in place if it is ever questioned; and
• Signing for the LLC: When you sign docu¬ments for the company, you must always use the full name of the company with the correct suffix (L.L.C., L.C.) and always sign your name as a member of the company with your title. For example, you would sign:
Fremantle and Jones, L.L.C., by Steve Fremantle, member
What Records are my LLC Required to Keep?
Generally, state laws require that an LLC keep a set of records at its registered office. These records typically include the following:
• Current list of names and mailing addresses of members and managers;
• Copy of the LLC’s articles of organization;
• Copies of the company’s income tax returns;
• Copies of the LLC’s Operating Agreement; and
• Copies of financial statements and records.
Is an LLC Required to Conduct Regular Member Meetings?
No. There is no requirement for the members to meet regularly. However, if your LLC has more than one member scheduled meetings will strengthen the protection your LLC retains against potential liability.
Of note, member meetings do not need to be held in person. They can be performed over the phone, via video conference, or even online. The most important thing is to take notes to keep a record of the meetings. This formality works in the LLC’s favor if someone ever challenges its limited liability status.
Generally it is a good idea to hold meetings whenever major decisions are being made. But even if you are a single-member LLC you should still record important notes as a formality.
Are there Any Limitations on Salaries for an LLC?
Generally, no. The members and/or managers can generally set whatever salaries they want for the LLC with limited exceptions. Of note, some businesses forgo salaries until they are profitable. If, however, you start out profitable or borrow startup money you can pay salaries from the beginning.
Some state and federal laws may affect your salaries. For instance, you cannot set your salary unreasonably low to avoid Social Security and Medicare taxes or employees below the minimum wage. Correspondingly, paying salaries that are too high could be a problem if it would defraud your creditors or investors. Check with a qualified accounting professional as to what would be considered reasonable in your industry.
Can an LLC Distribute Profits to its Members?
Yes. When profits allow, an LLC can distribute lump sum payments among its members. How distributions are made is usually set out in the Operating Agreement. If the Operating Agreement is silent as to distributions, the LLC should follow state law. Also, it is always recommended to check with a qualified tax advisor as to the best way to take out profits in your given situation.
Of note, an LLC is not allowed to make a distribution if such distribution would render the company insolvent. In other words, if you take money out of the company making it unable to meet normal obligations, you may be forced to pay that money back. There are a lot of fine points and exceptions to this rule. As such, if you get into such a situation you should check with a qualified accounting professional or attorney to get advice about what is permissible in your specific situation.
Can I Take a Personal Loan from the LLC? Can I Lend Money to My LLC?
Yes. However, if you loan money to your LLC or borrow from it you should always document both the loan and the repayment. If you run the LLC like another checking account it can cause you to lose your liability protection.
For any loan you should use a promissory note, sign and date it. When paid off clearly indicate the same on the note and keep it with your records. The better records you have, the better it will be for you if someone claims your business did not act independently of your personal finances.
Loans should generally be made in round, relatively large amounts such as $5000 or $10,000. Never use a company check or credit card to pay your personal bills and then pay it back at the end of the month.
MAINTAINING YOUR LLC
How Do I Maintain My LLC?
In most states, the LLC must file an report every year known as an Annual Report. A few states only require a report to be filed every other year known as a Biennial Report. Regardless of the frequency of the filing, the report usually requires that you fill out a form maintaining an up-to-date record of the status of your company, including the company name, address and member names with the state office or agency which received the original Articles of Organization for the LLC.
Most states require some sort of registration, business tax, or filing fee be paid along with your annual report.
Of note, failure to file your annual report on time can result in fines and potentially having your LLC dissolved. Additional fees then apply to reinstate an administratively dissolved company.
TTC Business Solutions can take the worry out of filing your Annual Report or Biennial Reports. Simply Answer a Few Questions about your business. We’ll check it for completeness and file it on your LLC’s behalf.
AMENDING AN LLC
Can You Amend an LLC?
Yes. LLCs are flexible enough to allow for amendments as needed. Of note, some amendments must be recorded with the secretary of state by filing official paperwork. Each state has its own requirements for when amending an LLC. Generally, however, changes that revise your Articles of Organization are typically required to be recorded with the secretary of state. These may include:
• Changes in members or management;
• Change of address for the LLC;
• Changes in the purpose of the business;
• Changes to the LLC’s name; and
• Changes to the Registered Agent.
Some of these changes may require written consent of your company’s members as well as an amendment to your company’s Operating Agreement.
Changes that only affect how a company is governed, for instance a change in the members’ voting structure, responsibilities, or business operations, generally are not recorded with the secretary of state. Always refer to your LLC’s Operating Agreement to understand how changes can be made to your entity.
How do I Amend the Articles of Organization?
You can amend an Articles of Organization typically by filing a correction or an Amendment to document and filing the same with the secretary of state with the required filing fee. There are some changes which require filing an amendment such as:
• Change in the LLC’s name or
• Change of Registered Agent.
How do I Change the Registered Agent of LLC Registered Office Address?
To change the Registered Agent or registered office, you must file paperwork with the secretary of state and pay the appropriate fees. It is important to notify the secretary of state when a registered agent or registered office changes. Failure to do so may result in your LLC incurring significant penalties ranging from monetary fines to dissolution of your company.
DISSOLVING AN LLC
How do I Close or Dissolve my LLC?
If the members decide to end the LLC business the process is called Dissolving the LLC. Generally, you will need to sell off inventory, if any, notify any creditors, and finalize any debt or other payment obligations. Additionally, there are legal requirements to dissolving the LLC.
First, the members and/or managers must document the decision to dissolve the LLC in writing. Second, the LLC should file official paperwork in the state in which it was formed officially dissolving the business. This will remove the company from the state registry of businesses such that you are no longer responsible for annual reports, taxes, and other fees or requirements.
What is Administrative Dissolution?
In most states, if your LLC has ceased to do business and you no longer wish to keep it active it is not necessary to take any special action to dissolve it. It will automatically be dissolved by the state if you fail to file your annual report or biennial report. This is known as administrative dissolution.
The drawback of dissolving your company this way, however, is that the fees to reinstate the company can be high should you change your mind and wish to resume use of the LLC. You may need to pay unpaid annual report fees as well as a penalties. Additionally, relying on administrative dissolution may result in additional taxes or fees incurred even after the business stops operating because the proper dissolution paperwork has not been filed.
If your company is struggling with debts that it is unable to pay at the time of dissolution, you may be better off to formally dissolve it or possibly file for bankruptcy. Should you consider filing for bankruptcy, you should seek the advice of a qualified bankruptcy attorney prior to doing so.
What Events Require Dissolution of the LLC?
Sometimes specific events require an LLC to dissolve. Some examples include:
• If the LLC was set up for a particular duration and its set term has expired;
• If a member dies and there is no provision for continuation after a member dies; and
• In states that require at least two members and if one member withdraws.
What are Articles of Dissolution?
In general, to formally dissolve an LLC you should file Articles of Dissolution to the secretary of state along with any filing fee so required. The Articles of Dissolution is the official document that informs the state that you have closed the business of the LLC.
Are there Advantages of Formally Dissolving an LLC?
An advantage of formal business dissolution is that when you give proper notice to creditors and then allow a period of time to pass, there is no risk that the members will be responsible for company debts.
Can the LLC Still Conduct Business After it has Filed its Articles of Dissolution?
What is Judicial Dissolution?
In certain circumstances, a court can dissolve an LLC. This is typically the result of a lawsuit brought by the state, a creditor, or a member. This is known as Judicial Dissolution.
Generally, state law dictates how this kind of action occurs. However, if the dissolution results by operation of bankruptcy or other federal law federal law may apply.
How are an LLC’s Assets Distributed Upon Dissolution?
Generally, most states require that when an LLC dissolves its assets must be distributed in the following order:
• To creditors, including members who are creditors;
• To members and former members to satisfy liabilities, if any; and lastly
• To members in proportion to their capital accounts.
What is the Importance of Defining the LLC’s Capital Structure?
Before you set up an LLC you need to determine its financial structure as well as a plan for future expansion.
There is no hard and fast rule as to how much capital you should put into an LLC. The more you assign as capital, the more you have at risk in the business. This, you may want to deposit as little as possible. However, if the company is sued and the company has few assets a court might decide that the company was undercapitalized and find you personally liable for company debts just as it could for a corporation. Additionally, undercapitalization may create tax problems by not counting enough of your contributions as capital or for contributing appreciated property. These matters should be discussed with a qualified tax specialist.
If you are starting a small business that does not need a lot of expensive equipment, generally a few thousand dollars is probably a safe amount with which to start. If you do need to buy expensive equipment, and the company can borrow the money from a third party to cover it, you would probably be safe as well. However, if you need to purchase expensive equipment or have other definable startup costs and personally loan the money to the company rather than contribute it as capital you should weigh the risks of a lawsuit and consider consulting an attorney or accountant who specializes in structuring new businesses.
One thing to keep in mind is that if you do not put in the amount of capital you state in your initial agreement and are later sued or file bankruptcy, you may be required to come up with any unpaid amount because it may be considered an unpaid debt to the company. That is something you could be held personally liable for. A judge could even use it as a reason to void the limited liability of the LLC.
What are Membership Interests?
Generally membership interests are paid for with money, property, services, or a promissory notes. The key thing to remember is that if a member fails to make a specified payment or takes the money back out other than in salary or a profit distribution, he or she may be personally liable to the company or its creditors for the full amount that should have been initially paid.
Other things to consider regarding Membership Interests include the following:
• If a member trades services for an interest in the capital of the company he or she generally must pay income tax on the value of interest at the time the services are exchanged for the interest. Of note, if the interest is only a share of future profits, the tax does not have to be paid until the profits are received.
• When appreciated property is traded to an LLC in exchange for a membership interest, the tax basis of the property carries over to the membership interest. Any tax on the appreciation is paid when the member sells his or her LLC interest.
• If the LLC sells the property, it may have to pay a tax on the amount received over the contributor’s basis.
Note, the above merely sets forth general guidelines. Based upon the complexity of our current tax laws it is recommended that you consult with a qualified tax professional for specific assistance if needed.
How do I Secure Funding for my LLC?
An LLC that needs money to get started or for expansion has several options for funding. Often, the members will simply contribute their own capital in exchange for an interest in the LLC. Friends and family may also contribute. Also, traditional means such as bank loans and outside investors should be considered. Finally, a more recent option has developed in the nature of crowdfunding.
What Should I Do when Securing Investments from Friends and Family?
Friends and family are appealing sources of LLC financing because they can provide quick cash without having to review forms, profit projections and business plans.
Beware, however, friends and family financing presents unique problems. Friends and family may not have experience in business or investing and may not understand that they are taking a financial risk. They may expect big returns and if you can’t deliver, your relationship may be forever damaged.
If you plan to seek funding from people you know:
• Advise them of the risk;
• Only take money from people who can afford to lose it;
• Have a detailed written contract to minimize misunderstandings and that specifies whether the money is a gift or a loan and how any loan will be repaid; and
• Urge your friends and family to seek outside advice before deciding to invest in your company.
When Does an Investor get a Share of the Business?
When a friend or family member invests in an LLC in exchange for a percentage ownership of the business it does not automatically mean that they must become a full business partner with management rights.
Although most small LLCs are managed by all of their members, LLCs can also be managed by a group of members who act as managers. In a manager-managed LLC, there may be members who invest money and share in the profits but who are not actively involved in the business.
To form an LLC that is manager-managed, you must amend your LLC’s Articles of Organization and Operating Agreement.
If you have outside investors, you may also need to comply with federal and state securities law. To determine if you need to comply with any state or federal securities laws, laws that govern stocks and other investments in companies where the person owning the investment does not participate in management, speak with a qualified attorney.