july2021 - 22

FEATURE
Everything You Need to Know
About LLCs to Help Your Clients
By Nellie Akalp
POPULAR FOR ITS owner liability protections
and flexible tax options, the Limited Liability
Company (LLC) is a legal structure option worth
exploring for clients who are starting or growing
businesses. In essence, the LLC is a hybrid
of a partnership and a corporation. Like the
corporation, the main benefit is, as the name
implies, the owners have limited liability. An
added advantage is profits may be taxed like a
partnership/sole proprietorship, which passes
income through to the owners (members),
avoiding the double taxation corporations face.
Unlike corporations, which can exist indefinitely (if corporate
compliance is met), most states limit the lifespan of
LLCs to 30 years before requiring renewal. To raise money, LLCs
can offer percentages of ownership and rewrite the operating
agreement to reflect a change in ownership.
LLC company owners are called members, and although
the compliance requirements for LLCs are more relaxed than
for corporations, there are still some questions your clients
may have on member guidelines. Here's what you need to
know about LLC member guidelines, including the difference
between single vs. multi-member LLCs, member-managed vs.
manager-managed LLCs, how to add new LLC members, LLC
membership interests, and more.
STEPS TO STARTING AN LLC
As with a corporation, the steps to starting an LLC begin at the
Secretary of State's office:
* Name search. Searching the state's database ensures the chosen
name of the LLC is not already in use. If the name is available,
the owner must register it with the state. Some states require
the initials " LLC " to appear at the end of the name.
* Articles of Organization. The Articles of Organization is a legal
document filed with the state containing critical information
about the company such as the legal name, management type,
date of formation, names, and information about the members
and their obligations. Once the Secretary of State approves the
22 JULY 2021 ■ www.CPAPracticeAdvisor.com
document, the LLC is recognized as a separate legal entity, and
that state is considered the LLC's home state.
* Acquire a Federal Tax ID number or EIN. A Tax ID or EIN
(Employer Identification Number) is a nine-digit unique number
provided by the Internal Revenue Service to identify a business.
The business must have a Tax ID number or EIN to open a business
bank account, hire employees, file for licenses and permits, and
pursue other business activities.
* Create an Operating Agreement. The LLC Operating Agreement
officially documents the internal organization of the company-
the roles and duties of its members and managers. Although
not all states require LLCs to have an Operating Agreement,
it's recommended to have one because it outlines the LLC's
financial and practical decisions. Once agreed upon and signed
by all members, the document further protects the owners from
personal liability. In addition, the Operating Agreement specifies
how business agreements and disagreements are solved and how
members may be added or removed.
Once established, the LLC must also adhere to the continuing
compliance requirements to remain in good standing with
the state. The LLC must file annual reports, hold member meetings,
and update the state about any changes to the business,
such as a change of address and membership.
THE DIFFERENCE BETWEEN SINGLE VS.
MULTI-MEMBER LLCS
As the term suggests, a single-member LLC has only one owner
(member). If there are two or more members, it is considered
a multi-member LLC. The owner of the single-member LLC
has complete control over the company, and the LLC is its
own legal entity, separate from its owner. In a multi-member
LLC, the members share ownership, but the business is legally
independent of the owners. Multi-member LLCs can have an
unlimited number of members (unless it elects to file taxes as
an S Corp, which allows for only 100 or fewer members).
For income tax purposes, the single-member LLC is deemed
a " disregarded entity " by the Internal Revenue Service, and its
profits and losses are reflected on the owner's federal tax return.
The single-member LLC may elect to be taxed as a corporation.
Multi-member LLCs are taxed as partnerships with the
profits and losses divided evenly among the members unless
otherwise specified in the LLC's Operating Agreement. Percentages
of ownership are typically called " LLC units. " Multi-member
LLCs can also file as a C Corp or S Corp if they so choose.
http://www.CPAPracticeAdvisor.com
july2021

Table of Contents for the Digital Edition of july2021
