WHAT IS A LIMITED LIABILITY COMPANY?One of the most common questions I'm asked is, "What is a limited liability company?" Simply put, the limited liability company or LLC is not a partnership or a corporation. An LLC 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 advantage of pass-through taxation. What paperwork is required when forming an LLC? Articles of organization must be prepared and filed with the state and filing fees. A federal tax identification number will also be needed. An operating agreement, which is similar to a corporation's bylaws, is an agreement among the LLC's members which governs the LLC's operations and rights of its members should be prepared and signed by all members. What should I name my LLC? Choose the name of your LLC carefully. It is very important that your name portray the image you want for your new company. Legally, the name you select when forming an LLC must not be "deceptively similar" to any existing company or must be "distinguishable on the record" of Oregon Secretary of State. It is possible that the name you select will not be available; therefore, we ask for a second choice on the LLC. Additionally, Oregon requires that the name you select when forming an LLC show your business is a limited liability company by including either the words "Limited Liability Company," or the abbreviation LLC. How many people are needed when forming an LLC? One of the advantages of limited liability company is flexibility. The IRS allows one member LLCs to qualify for pass-through tax treatment as a disregarded entity; however an LLC can have an unlimited number of members. How is an LLC taxed? Depending on the number of members, an LLC can be taxed for federal income tax purposes as a disregarded entity, a partnership or a corporation. If the LLC has one member, the LLC can be taxed as a disregarded entity or corporation (default is disregarded entity). If the LLC has two or more members, it can be taxed as a partnership or corporation (default is partnership). What is the organizational structure of an LLC? An LLC is owned by its members. They are analogous to partners in a partnership or shareholders in a corporation, depending on how the LLC is managed. A member will more closely resemble shareholders if the LLC utilizes a manager or managers, because then the members will not participate in management. If the LLC does not utilize managers, then the members will closely resemble partners because they will have a direct say in the decision making of the company. A member's ownership of an LLC is represented by their "interests," just as partners have "interest" in a partnership and shareholders have stock in a corporation. How is an LLC managed? An LLC may be managed by its members (owners) or by selected managers. If the LLC is to be managed by its members, it operates much like a partnership. Each member has an equal say in the decision making process of the company. If the members choose, they may elect a manager or managers to act in a capacity similar to a corporation's board of directors. These managers are in charge of the affairs of the corporation. Member management is the normal default rule of state law. This means that if managers are not selected in the articles of organization, the members will direct the affairs of the LLC. What should the Operating Agreement include? A good Operating Agreement typically covers the following types of issues: Requiring super majority approval or unanimous approval of members for major company decisions such as borrowing large amounts of money, entering into major contracts, amending the Articles of Organization, changing the capital structure of the company, hiring or firing people related to members and managers, setting compensation of key employees, and entering into contracts with related parties or companies affiliated with members or managers. Restricting members from selling, encumbering or transferring their interests in the LLC without first giving the company and other members a right of first refusal to acquire the membership interest. Setting the company's and members rights following a member's death, disability, divorce or incapacity. The agreement can obligate the company to purchase the interest of a deceased member or give the company and other members options to purchase the interest of a deceased member. Acquiring life insurance to fund the purchase of the interest of a deceased member. Fixing the value of membership interests in certain situations such as the purchase by the company of the interest of a deceased member. Requiring minority members to sell their interests when the majority of the members want to sell the company. Requiring members to cooperate if the company makes a public offering of securities. Providing for "dead-lock" buy-out procedures that can be used to facilitate a "divorce" when members can no longer get along or work together or want to go their separate ways. What are the advantages of a Limited Liability Company? There are numerous advantages of Limited Liability Company formation:
The disadvantages of an LLC include:
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