Forming a LLC -- The Basics

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Interested in forming a LLC? LLC’s are flexible business forms that are designed to give the benefits of other business forms, such as corporations and partnerships, with less formality than a corporation provides but more liability protection than a sole proprietorship or partnership.

What is a Limited Liability Company?

An LLC is an unincorporated entity organized as an LLC under state law. The LLC is designed to offer the limited liability of a corporation and the flow-through tax advantages of a partnership. In an LLC, owners may choose centralized management or owner management, free transferability of ownership or restricted transferability, and many more flexible options. How this works for each business depends on the Articles of Organization and Operating Agreement of the LLC.

How do I go about starting an LLC?

An LLC may only be formed by filing the appropriate documents with the appropriate state agency. Typically, there must be Articles of Organization filed with the state, and an operating agreement (although the operating agreement is not required by every state—it is for internal use).

Advantages:

• very flexible business form

• can choose to be taxed as a corporation or flow-through, like a sole proprietor or partnership

• members not personally liable for business obligations

• generally lower start-up costs than a corporation

• greater flexibility in management than a corporation

Disadvantages:

• transfer of ownership more difficult than a corporation

• if an LLC fails to adopt an operating agreement, the member or members will be unable to take full advantage of the benefits of forming an LLC and default provisions in the act will determine distribution and voting rights

Although the information here is generally accurate, it is important to note that every state has different requirements for business formation of any business type-sole proprietor, partnerships, corporations and LLC’s. Consult with your state’s laws or an attorney to ensure that you are following the proper procedures for forming a LLC.

Forming a LLC - or start a Corporation? Learn more about corporations here.

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