Limited Liability Company

Limited liability companies (LLCs) have become the most common typeof new business since their introduction by state laws in the last 30 years because LLCs combine the tax advantages of partnerships with the limited liability of corporations. This business form may be a good option for a website or blog with significant liability exposure. Owners of an LLC are called "members." You can operate an LLC as the sole owner (single-member) or in conjunction with fellow owners (multi-member). Members can run the business by themselves, or hire employees and/or independent contractors to carry out tasks for them. Among other requirements discussed below, an LLC is formed by filing articles of organization with the state and executing a formal operating agreement,which sets down ground rules for what capital contributions arerequired from the members, how the business will be managed, and how profits and losses will be allocated, among other things.

In determining whether you want to operate as an LLC, you may want to consider the following factors:

  • Liability: Members of an LLC enjoy limited liability for the debts and obligations of the business, including liability for the unlawful acts of other members and employees. For instance, if a fellow member writes a defamatory article or posts copyright infringing material on your jointly-run website or blog, then your liability ordinarily is limited to amounts invested in the LLC. The same goes for a defamatory article or infringing post published by an employee of the LLC on the company website. Under some circumstances, you could still be held personally liable your own unlawful actions, but for the most part your personal assets would be off limits.
  • LLCs, like corporations, are subject to the legal doctrine known as "piercing the corporate veil," which can result in members losing limited liability protection in extremely rare circumstances.

  • If you apply for a small business loan, the lender probably will require you to give a personal guarantee. In that case, you are personally responsible for the paying back the debt, even if the business is an LLC and even if there is no basis for piercing the corporate veil.
  • Formation: Forming an LLC is moderate in terms of burden and cost. Please see the Forming an LLC section for details on the required (and advisable) steps. It requires filing articles of organization with a state office, usually the Secretary of State. Creating and submitting articles of organization for an LLC is simple and generally does not require the assistance of a lawyer, but there usually are significant filing fees. LLCs do not have the perpetual existence of corporations, and many states require that the duration of the LLC be specified in the articles of organization. You and your fellow members should also draft and execute a operating agreement, and some states require this. Drafting one that is highly customized to your business may involve some complexity. It will be up to you and your fellow members whether the assistance of a lawyer is required.

  • Management Structure: You have a great deal of flexibility in how you structure the management of an LLC because members may designate their desired management structure in the operating agreement. In general, LLCs are attractive because they allow for an informal, de-centralized management style with the members taking direct control over the day-to-day management of the business.
  • It is important to include a clause regarding the desired management structure in the articles of organization, in addition to the operating agreement, to make sure the members' choice of structure is honored under state law.
  • Operation: Operating an LLC is moderate in terms of burden and cost. As a general matter, there are fewer formalities associated with running an LLC than a corporation, and members can customize meeting, voting, and other operating procedures in the the operating agreement. However, in order to maintain their limited liability protection, members should observe certain formalities, such as keeping detailed financial records and recording minutes of major decisions. Additionally, state laws impose record-keeping requirements, as well as annual or biennial reporting requirements (and fees), all of which tend to drive up the cost of operating as an LLC. Some states place an annual franchise tax on LLCs. For details on annual/biennial reporting requirements, fees, and franchise taxes, see the the State Law: Forming an LLC section. This is all in addition to the tax and other regulatory obligations imposed on all small businesses. For more on the tax obligations of small businesses, see the Tax Obligations of Small Businesses section and the IRS's informational guide, Publication 583 (1/2007), Starting a Business and Keeping Records.

  • Ownership of Assets/Distribution of Profits: Assets of the LLC, including those originally contributed by members, are owned by the company, not by the individual members. The property rights of LLC members include rights in management and control of the business and financial rights to share in profits, distributions, and other financial benefits. Allocation of profits among members is generally set in the operating agreement, and members are free to structure the distribution any way they please. Absent a provision in the operating agreement, state law will determine whether profits and losses are distributed on a per capita basis (i.e., 4 members, each get 1/4 share) or based on the amount of capital contributed to the business. While a member's economic rights in an LLC may be transferred, the transferee cannot become a full member of the LLC unless the other LLC members unanimously consent.
  • Among the most important assets of any business that operates a website or blog are its articles, posts, videos, and other content. For details on who owns what from a copyright perspective, see the Copyright Ownership of Articles and Posts section.
  • Tax Treatment: Members of an LLC can choose to be taxed as a partnership or a corporation. If the LLC is treated as a partnership (which in the case of an LLC with multiple members, it would be absent the election below), then the LLC's income and expenses are "passed through" to the members, and they pay tax on their share of the profits at their individual income tax rates. In this way, they generally are not subject to the "double taxation" associated with corporations. If members elect to have the LLC taxed as a corporation using a Form 8832 - Entity Classification Election, the LLC will file its own income tax returns.  Members need not file Form 8832 if  they want the LLC treated as a partnership because the default entity is a partnership. Special, but similar, rules apply for single-member LLCs. For details on the tax obligations of LLCs, see the Limited Liability Company page on the IRS website.

  • Other Considerations: If you want your LLC to "do business" in states other than the one in which it is organized, you need to register as a "foreign" company doing business in that state. You do not need to do this simply because your website reaches the residents of other states. It might be an issue, however, if one of the members of the LLC worked (i.e., contributed content to the website or blog) from another state, and it would likely be required if your LLC had an office there. State procedures for obtaining this registration vary, but commonly there is a specific form that you need to complete, and you will need to submit copies of the articles of organization and a certificate of good standing from your state. There will also be a registration fee. To get the process started, you should visit the Secretary of State's website for the state in which you want to register.
 

Last updated on August 26th, 2008

   
 
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