A LLC or Limited Liability Company is a form of enterprise which uses certain elements from a partnership and a corporate structure. This type of company is legal and provides a limited liability for its owners in most US states. Furthermore, an LLC need not be organized for profit. A limited liability company can be called a hybrid because not only can it have the form of an enterprise or partnership, it can also be in the form of a sole proprietorship. An LLC is a business entity, it is an unincorporated association and therefore not a corporation. It shares the limited liability property of a corporation and the pass-through income taxation of a partnership. An LLC is a good model for single person ownership.
As a hybrid enterprise, a limited liability company is much less strict in terms of its shareholders. Despite this, it is much more difficult to pierce the veil in an LLC because there are few formalities that they maintain. The reason behind this is that members of an LLC do not commingle its funds. A good thing with limited liability companies is that it offers a certain amount of protection with its members’ and partners’ interest. It does this by putting out a charging order which sets limits on the creditor of a debtor-member/partner depending on the debtor’s share of distributions. This is without having to confer to the creditor any management or voting rights.
Since LLCs have fewer formalities than most other business entities, they have a set of default rules that they must all follow. All LLC statutes contain the phrase “unless otherwise provided by the operating agreement” or a similar one. This gives LLCs flexibility in terms of its governance. The law or the State also provides a set of default rules for LLCs and vary accordingly. Before we discuss which States are the best for setting up an LLC; forming an LLC must be discussed first.
Forming an LLC
Forming LLCs very between States and must be reviewed thoroughly in order to get the most out of its formation. There are certain steps that must be followed when forming and LLC in all States or a variation thereof. All aspiring LLCs must file articles of organization with the respective secretary of state’s office. This is usually a form asking for the names of its members and related information. There’s usually a registration fee that varies from State to State.
An LLC must draft the arrangements or the operating agreement of the business and its members. This not always required by law but it gives a clear method on how the LLC will go about its business and the relationships of its members. Having this agreement protects the structure of the LLC and is a necessary document should a court case be filed. Lawyers are not a requirement for an LLC because the state mandates the terms and is usually self-explanatory. Some states pass fees (annually) or taxation which might hinder the formation of an LLC.
State of the State
Perhaps the primary reason for choosing a state to form an LLC is whether or not it provides a large or small tax. Taxation, even though it can be curbed with the pass-through income taxation, hinders the economic advantage of an LLC. Certain states have policies that are advantageous for LLCs and others mandate a smaller tax. These states are usually the ones to watch out for.
The states of Wyoming, Delaware and Nevada are a common choice for forming an LLC. Delaware has the Chancery Court. This is a special court which decides on business matters of the state. The advantage of having this specialized state is that it tends to business cases swiftly unlike other states where most of the time it gets backlogged. Judges in the state are also specialized in business matters granting a swift and just trial.
The state of Nevada is known for all its bright lights and entertainment 24/7. On the business end, it also is very appealing. Aside from one of the few states that have zero taxes, it also includes a lot of benefits. For one, Nevada allows absolute anonymity. The state even allows LLCs for non-residents (even from outside the country!). There are so much more that Nevada has to offer and all one needs to do is search for it. The state is probable the least strict among all other members of the union.
Wyoming is another state that has zero taxes. In fact, the state has similar benefits to Nevada albeit less glitz and glamour and more sights and sounds and nature. The one thing that separates Wyoming from Nevada is that it allows a “lifetime proxy”. This proxy is allowed to vote for the behalf of the one he substitutes. This allows an owner to hide his identity by letting his proxy hold his stocks.
The important thing to remember is that in choosing which state to make the LLC, review the rules that are set about by the state itself. Or even easier, just pick any of the three above mentioned states.