Join Dana Robinson for an in-depth discussion in this video Understanding the LLC, part of Setting Up Your Small Business as a Legal Entity.
- Now, if you've come to the conclusion that you need an entity because you want limited liability and/or you have multiple owners. The next step is to determine if you want to form an LLC or a corporation. Typically, small partnerships and solo businesses are formed as limited liability companies or LLCs. Businesses that intend to take on investors or have passive shareholders that aren't involved in the day-to-day operations of the business are often formed as corporations. Let's start with the LLC.
A limited liability company is a fairly new innovation. It provides the business owner the ability to have a corporate shield in the nature of a corporation. But the LLC uses partnership operational structure rather than the formalities that a corporation must observe. The LLC allows an individual to operate the company without annual meetings and other formalities required by corporations. The LLC also allows the owner to have partners in the business that function as partners with shared control. If two partners form a traditional corporation they always face the question, "Who's the president? Who's the boss?" If three partners form a corporation then two can often oust the third from management.
The LLC on the other hand is different in that both or all three partners or more partners can share control and be active in the management of the business entity. So, the LLC has become the preferred entity structure for small businesses. Most new small businesses are advised to form as limited liability companies. As a result today, the most popular entity type is the LLC and the vast majority of those businesses are actually owned by one person. That is so common that one person owns an LLC that the IRS has created a special category for taxation for single-member LLCs known as the disregarded entity.
It doesn't mean the entity doesn't exist, it means that for a single-owner LLC the IRS wants to make it easy to file your taxes. You don't even have to file a corporate return or partnership return. You just file the same Schedule C on your 1040 that you would have had you been a sole proprietor. So, if your business is entirely owned by you or by a husband and wife, then the LLC is probably right for you. If you're a small operation which has two or three owners and all of you are involved in management, the LLC is probably appropriate as well.
If you have a silent partner, a rich uncle, or an investment backing your venture, then the LLC is still probably the right entity type for you. To form an LLC, most states have a simple one-page form that you fill out and often submit online. Once you've done that, then you only need one additional document called the operating agreement. This is an agreement that says how the LLC operates. Now sample operating agreements are widely available online. You should be careful about using generic free legal forms that you find on the internet.
But the forms that you'll find showing an LLC operating agreement will help you learn how to operate your company. Reading the LLC operating agreement will help you see inner workings of the LLC and eventually will help you discuss the particulars of your operating agreement with an attorney that you may hire.
DISCLAIMER: This course is taught by an attorney and addresses US law concepts that may not apply in all countries. Neither LInkedIn nor the attorney teaching the course represents you and they are not giving legal advice. The information conveyed through this course is akin to a college or law school course; it is not intended to give legal advice, but instead to communicate basic information to help viewers understand the basics of intellectual property.
- What is a sole proprietorship?
- Understanding corporate entities
- Exploring corporations and LLCs
- Choosing a corporate entity
- Creating an operating agreement
- Exploring incorporating examples
- Establishing an IRS tax ID