Starting a Business: Limited Liability Companies
There are four basic forms of business organizations available: limited liability companies (LLCs), partnerships, sole proprietorships, and corporations. This post deals with limited liability companies (LLCs).
The proper choice of the form of business operation will affect your business for a long time. Obtaining my assistance or the assistance of another attorney who is knowledgeable in this practice area is critical to your success.
Here is some information about LLCs, as well as a couple of the considerations when selecting which form of business operation is best for you.
What is a Limited Liability Company?
An LLC is probably one of the most popular forms of business operations today. An LLC is a separate legal entity from its member(s) (i.e. the owner[s]).
An LLC is flexible and can be organized under either Illinois or Wisconsin law or really under any state law you choose. The fee for organizing an LLC and for filing the required annual report for the LLC is cheaper in the state of Wisconsin.
I find that most of my Illinois clients find it worth their time and effort to establish a Wisconsin presence is order to organize their LLC under Wisconsin law thereby reducing the costs of organizing the LLC and maintaining it through filing the required annual reports with the state.
It is less expensive to organize and operate a Wisconsin LLC than an Illinois LLC. Although an LLC is not a corporation, it provides its owners with the same liability protection of a corporation.
How is an LLC organized?
The LLC is formed when an organizer files Articles of Organization with the state (In Wisconsin, all documents are filed with the Wisconsin Department of Financial Institutions) and pays the filing fee. The owners, called members, receive “membership interests” in the LLC in exchange for services, property or cash. If there is more than one member of the LLC, the members usually enter into an Operating Agreement which, together with the state laws governing LLCs, defines the obligations and duties of the members. An LLC is required to file an annual report with the Wisconsin Department of Financial Institutions or the State of Illinois.
An LLC can be managed by its members or by a manager or management committee. If the LLC is managed by a manager or management committee, the Operating Agreement sets forth the guidelines for the manager or management committee and the limitations and rights to manage the company by the members. If an LLC is managed by a manager or management committee the manager and/or managers have management authority similar to that held by a general partner of a limited partnership. If the LLC is managed by its members, each member has the same broad authority as do general partners in a general partnership. An LLC may have officers appointed similar to a corporation.
What type of tax structure does an LLC have?
An LLC most typically will be taxed as a sole proprietorship (if it has only one member or only a husband and wife are the members) or as a partnership (if it has two or more members). An LLC may also elect to be taxed as a corporation although most LLCs do not make that election.
If the LLC is taxed as a sole proprietor the LLC does not file a separate income tax return, and all of the business income and expenses are reported on Schedule C of the member’s personal Form 1040 (personal income tax return).
If the LLC is taxed as a partnership, the LLC must file its own income tax returns (IRS Form 1065 and Form 3 Wisconsin) but the items of income and expenses are passed through to the income tax returns of the individual members and the LLC pays no taxes itself.
If the partnership is taxed as a corporation, the LLC files a separate income tax return (IRS Form 1120 and Form 5) and pays its own income tax separate from the individual members. A special election can be made where the LLC is taxed as a “S” corporation which is similar to a partnership under the tax laws.
An LLC taxed as a partnership or as a corporation must have a tax identification number.
Even if an LLC is taxed as a sole proprietorship, I recommend that the LLC obtain a tax identification number for tax purposes so to reduce potential identity theft of the sole member’s when performing business operations.
If the LLC has employees, the LLC must withhold taxes and pay employer taxes just like a corporation does.
Does an LLC offer liability protection?
LLC members and managers receive limited liability protection. They are not liable for the debts and obligations of the business, unless they guarantee the obligations or fail to pay withholding taxes. If an LLC violates environmental laws, the members may have personal liability for the violation.