Limited Liability Companies Defined

The following are a number of questions and concepts specific to Limited Liability companies along with their respective answers and definitions. The information provided will provide the basic knowledge necessary for someone interested in forming an LLC. An additional bonus are the examples which give real world applications and tie everything together.

  1. What is A Limited Liability Company?

A limited liability company or “LLC” is a business entity that is authorized by specific legislation in most states of the United States and in many foreign countries. In almost every instance, the state or country in question issues a charter to the LLC upon its formation. The most significant characteristic possessed by LLCs is part of its name, that is, it provides limited liability. In this regard, it is very similar to a corporation. get a “doing business as” (DBA) registered in Texas

  1. How Do You Form An LLC?

An LLC is formed by filing the Articles of Organization with the relevant secretary of state in the U.S. or other licensing agency in a foreign country. The Articles of Organization are normally very brief and simple and provide only basic information with respect to the name of the company, the agent for service of process, the company’s address and its manager or members.

  1. How Is An LLC Structured?

An LLC is structured much like a partnership except that it has members instead of partners. The LLC can be member managed in a manner similar to a general partnership or it can be manager managed like a general partner does in a limited partnership. If the LLC is member managed, normally, all of the members have an equal vote and decide between themselves on not only the major business and financial policies, but, also the every day operations. If the LLC is manager managed, the members only decide on major financial and business decisions and the manager handles all of the day-to-day business operations.

  1. How Is The Structure Of The LLC Determined?

The founding members or promoters of the LLC determine the structure of the LLC by means of an Operating Agreement which is similar to a Partnership Agreement. Normally, when the Articles of Organization are filed, the state requires that the organizers determine in the Articles whether or not the LLC is member managed or manager managed. The members have an experienced attorney draft the Operating Agreement which sets forth the different rights and responsibilities of the members and covers matters such as capital contributions, division of profits, management, member meetings, transfers of member interests, dissolution and indemnification.

  1. What Are The On-Going State Fees For An LLC?

California imposes an $800 Annual Franchise Tax on LLCs. This amount is due on the 15th day of the fourth month after the beginning of the fiscal year. For the first year, the due date is the 15th day of the fourth month from the date the LLC was organized. In addition, California, in its arrogance, also imposes a gross receipts tax on LLCs. For LLCs whose annual revenue is between $250,000 and $499,999, the additional fee is $900. The fee increases to $2,500 for annual revenues between $500,000 and $999,999 to $6,000 for annual revenues between $1 million and $499,999, and to $11,790 for annual revenues of $5 million or more.

  1. Tax And Accounting Treatment?

The LLC can elect to be taxed as either a partnership or a corporation. Almost always it is better to be taxed as a partnership. What this means is that the LLC files an Information Return and issues K-1s to its members showing the member’s share of the income or loss that the LLC incurs. The members then report this amount on their own individual Returns. The LLC, if it is taxed like a partnership, does not pay any income tax. If the LLC is a single member LLC, the owner may treat it as a disregarded entity for tax purposes and report the tax and related accounting on the individual tax return of the member. This eliminates the necessity of a tax return for the LLC.

  1. Charging Order Protection

A charging order is a court order available to a judgment creditor directed to a limited liability company or limited partnership of which the judgment debtor is a member or partner which grants the judgment creditor the right to whatever distributions would otherwise be due to the debtor member/partner whose interest is being charged. The purpose of the charging order is to prevent the judgment creditor of an individual partner/member from access to the partnership/LLC assets while at the same time, giving the creditor some relief relative to distributions from the entity to the partner/member. The charging order denies the creditor direct access to the LLC assets and limits the creditor exclusively to collection of the income or distributions which the LLC assets might engender, but which can be withheld from distribution at the discretion of the LLC manager. What this means is that a creditor who has obtained a charging order only has the right to receive distributions from the entity when and if such distributions are ever made even though the entity itself may have substantial income. The charging order remedy is often times the exclusive remedy available to the creditor and provides substantial asset protection for the LLC owner.

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