Reuting - Limited Liability Companies For Dummies

Limited Liability CompaniesFor Dummies, 3rd Edition

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Library of Congress Control Number: 2013956850

ISBN 978-1-118-85298-9 (pbk); ISBN 978-1-118-85653-6 (ebk); ISBN 978-1-118-85659-8 (ebk)

Manufactured in the United States of America

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Chapter 1

In This Chapter

Understanding LLC basics

Creating your plan of attack

Knowing the essentials for operating an LLC

The Limited Liability Company (more commonly known by its acronym, LLC) is by far the most popular business structure. Only a decade ago, the LLC was the new kid on the block untrusted and unverified. Luckily, that changed pretty rapidly LLCs gained popularity and, within a short time, became firmly established in the business world. Since then, LLC has become a household term, and for good reason.

The LLC is a complete divergence from its predecessor, the corporation. While corporations have a fixed management structure, LLCs offer flexibility. While corporations have strict rules regarding owners and profit distributions, LLCs are adjustable. While corporations are stuck with corporate taxation (or its limited variant, S corporation taxation), with an LLC you can select whichever form of taxation you prefer. The added flexibility of the LLC enables you to build a solid foundation for your business that works for your exact circumstances.

Great, right? Well yes and no. With all the hoopla and the incessant commercials from filing companies, we all know how easy it is to file an LLC. However, very few folks can really explain how an LLC works, or why an LLC is right for your situation, or, even worse, how to actually structure it after receiving that one-page filing back from the state. Aside from hiring a pricey attorney (not an option for most people), the majority of your peers dont know how to do simple things like issue the ownership properly or formally agree on what happens if one of the partners wants to leave.

The LLC is a powerful tool, but if you dont know how to use it how to build that crucial foundation that will support your greatest potential then it really amounts to nothing more than the piece of paper on which your formation document is printed and possibly a few lawsuits along the way.

I go into detail on setting up an LLC for your specific circumstances later in the book, but first I want to give you an overview or a refresher, if youre a seasoned pro on the meat and bones of this awesome business structure.

Think of an LLC as a partnership on steroids. If you and a buddy were to get together and start a business without registering it as any particular business structure with the state, your business would automatically be considered a general partnership. All business income and losses would be reflected on your personal tax returns. No rigid formalities would be required you could literally draft your agreements on a napkin.

The problem is, what happens if you want to raise capital? The business is comprised of only you and your partner, and possibly some assets that youve acquired along the way. You cant exactly sell pieces of yourself. Or what if your partner ends up being, well, a jerk? Or even worse, a jerk who runs up a lot of debts that you could be personally responsible for? Eek! As unfair as it sounds, thats the reality for partnerships. Until the LLC came along, that is.

The LLC takes all the best features of a partnership (pass-through taxation defined at the end of this chapter and no hefty burdens of corporate formalities) and the best features of a corporation (personal liability protection and ownership shares) and then adds a few extra perks for good measure, like the capability to choose your own form of taxation and a formal yet flexible management structure. In addition, the LLC can offer a second layer of liability protection that shields the business from any personal lawsuits that may befall you (referred to as charging order protection, which I elaborate on in Chapter ).

If all this sounds like Martian to you, dont worry. In this chapter, I dive into some of those benefits and other LLC fundamentals a bit more, all while steering you toward other chapters in the book where you can read about specific topics in more detail.

Although LLCs are separate from their owners in a lot of ways, they still need to have them. An LLC without an owner is like a child without parents: It simply doesnt exist. So, even though you may have called up a filing company and filed your LLC with the state, until you go through the process of doling out ownership in your LLC, it doesnt become its own legitimate entity.