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Forming an LLC

by Seth Miller

An LLC, or limited liability company, is a distinct type of business that offers an alternative to partnerships and corporations by combining the corporate advantages of limited liability with the partnership advantages of pass-through taxation. An LLC comes into existence when articles of organization are filed with the state, and filing fees are accepted by the proper state authority.

An LLC is owned by its members, who are either partners in a partnership or shareholders of a corporation. If LLC uses a manager, then he will act like a shareholder, because a member does not participate in the management of the LLC. However, if the LLC does not have a manager, then the member will more closely resemble partners because they will have decision-making powers in the LLC.

The basic advantage of an LLC is pass-through taxation, allowing the earnings of an LLC to be taxed only once. The member's liability is generally limited to the amount of money which the member invested in the LLC. As a result, the members of an LLC receive the same limited liability protection as do shareholders of a corporation. To have pass-through taxation, an LLC may not have more than two of the characteristics of a corporation like limited liability, unlimited life, free transferability of interest and centralized management. (If the LLC is managed by managers, the LLC will have centralized management.)

At the same time, not only does an LLC require more paperwork and documentation, there is the possibility of losing pass-through taxation status if the LLC is not properly structured. To form an LLC an organization should prepare articles, file with the state and pay filing fees, initial franchise taxes, and other initial fees. Though you do not require a lawyer, certain knowledge is necessary in order to properly file the required documentation in the designated state.

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