ComplianceAugust 24, 2021

BizFilings expert insights: All about LLCs

Limited Liability Companies (LLCs) are among the most popular entity types when it comes to business incorporation. While they have a positive reputation, it’s always important to do your due diligence and ensure that an LLC is the right fit. In this episode of Expert Insights, CTs Manager of Customer Service, Tim Jensen, discusses all things LLC so that you can go into the entity formation process with confidence.

Tim reviews the myriad benefits of LLCs, including limited liability protection, pass-through taxation, flexible management and membership options, and heightened credibility. He discusses things to take into consideration before deciding on an LLC, such as the cost and transfer of ownership. Plus, learn the ways in which you can incorporate as an LLC and what to do once you finally decide to make the move.


Greg Corombos: Hi, I'm Greg Corombos. Our guest in this edition of Expert Insights is Tim Jensen, manager of customer service at CT Corporation. Today we're going to be looking at perhaps the most popular formal entity that businesses can establish, the LLC. What is it? Why is it so popular? And what are the major benefits of establishing an LLC? And Tim, always great to have you with us. Thank you for your time today.

Tim Jensen: Thanks, Greg. It's great to be back with you again today.

GC: Well, let's start with the very basics. What is an LLC?

TJ: Yeah, an LLC or Limited Liability Company is a legal business structure that offers the limited liability protection of a corporation with pass-through taxation of a sole proprietorship or partnership, they have definitely become very popular option for business owners over the last 25+ years since they've been created.

GC: So why are LLCs so popular for so many businesses? Tim, what are the advantages of establishing that particular entity?

TJ: Yeah, great question, Greg. And actually, there are several advantages to choosing an LLC as your business structure. And the first is limited liability protection, which is really one of the biggest benefits of creating a legal business entity. Essentially, owners are shielded from personal liability for acts of the LLC, meaning creditors cannot pursue the personal assets such as a house, savings accounts, etc. of the owners to pay off any business debts. Whereas with sole proprietors and general partners, the personal assets can be pursued against the business's debts.

The second one with an LLC, as far as benefit goes, is the pass-through taxation. LLCs typically do not pay taxes at the business entity level. Any business income or loss is passed through to owners and reported on their personal income tax returns. Any tax due is then paid at the individual level. Whereas corporations that cannot or choose not to be taxed as an S corporation are taxed at the business entity level, and then their shareholders are taxed on the income distributed to them. And this is sometimes referred to as double taxation.

Thirdly, with LLCs, the LLCs offer a flexible management and membership options for the owners. Members can manage the LLC themselves, or elect a management group to do so on their behalf. Also, the members can be individuals, partnerships, trusts, or even corporations. And there's no limit on the number of members that can be part of an LLC. Whereas an S corporation, which is essentially a corporation that has elected to be taxed as a pass-through entity under the Subchapter S of the IRS code, are much more restricted on who can be a shareholder—and there's actually a maximum limit of 100. And corporations, on the other hand, are also managed by a board of directors and not by shareholders. So, the LLC does offer a lot more flexibility in the management options than some of the other entity types go.

And then lastly, there is the heightened credibility, you know, that comes with having an LLC and being an official entity. Starting an LLC can definitely help a new business establish its credibility, more so than if the business operates as a sole proprietorship and partnership. And this can go with lending, capital, and can also even go with such stuff as working on contracts with the businesses that you do business with, they're more likely to want to do business with you. If you are an actual structured entity like an LLC.

GC: Well, I know you're all about due diligence, Tim, and so is CT Corporation. So, what are some of the things that people should know before choosing an LLC as their entity?

TJ: Yeah, and there are definitely a few things that people should take into consideration while deciding if the LLC is actually the best choice for them with the different types of entities that are available. First, obviously, is the cost. What does it cost? LLCs typically are going to cost more to form and maintain than a sole proprietorship or a general partnership will. So, if you're one of those entities, you'd expect to have to pay a little bit more for this. The states do charge an initial formation fee. And many states also impose ongoing fees such as annual reports and franchise tax fees. I always say it's a good idea to check with the Secretary of State's office to confirm these fees, you know, as all states are different.

The other thing with LLCs is regarding the transfer of ownership. Ownership in an LLC is often harder to transfer than with a corporation. So, we know with corporations, shares of stock can be sold by the corporation to either increase ownership, and unless there's any type of shareholder agreement to the contrary, the shareholders can sell their shares to someone else whenever they feel like it.

But with LLCs typically, unless the members agree otherwise, all the members must approve adding new members or altering the ownership percentage of the existing members before any of that can be done. So, while it isn't necessarily problematic, it can be a little bit more time-consuming and difficult to get through the membership transfer in an LLC than it can with the corporation just based on how it’s handled with each entity type.

GC: Excellent, excellent information, Tim. So, you've done your due diligence, you've looked at your various options you've decided, LLC is the right entity for your business. What next? How do you get started setting up an LLC?

TJ: Yeah, and once you've made the decision that that LLC is the way to go, Articles of Organization forms must be filed with the Secretary of State in the state or states that you want to do your business in, and then any initial fees must be paid at that point in time.

Also, when you form an LLC or register an existing LLC to transact business in another state, which is called a foreign state, you are also required to have a Registered Agent in the state of formation or qualification. The term Registered Agent sometimes is new to people, they don't quite necessarily know what that is. Essentially, a Registered Agent, also known as an agent for Service of Process, receives important legal and tax documents on behalf of the LLC. These can include documents such as notices and communications mailed by the Secretary of State, such as annual reports or statements, or tax documents sent by the state's Department of Taxation.

A Registered Agent also must be available to receive Service of Process, and this is sometimes called notice of litigation, which are documents typically a summons or a complaint that provide notice that a lawsuit has been filed against the LLC. Other court documents such as garnishment orders and subpoenas are also served on the Registered Agent. So, the business owner could act as their own Registered Agent as long as they meet the requirements that are out there. Or they can select a company to act as the Registered Agent on their behalf.

Lastly, after you file the LLC forms, it's definitely a good recommendation that the LLC hold an organizational meeting of the managers and the members, however structured. This meeting helps to start off the LLC on the right foot by adopting an operating agreement, issue the membership certificates, and undertake any other preliminary matters, you know, such as who's going to open up the bank account and things like that.

It's important to do this at the beginning so there's a plan in place on how the business is going to be run. And this is especially important when there are disagreements amongst the members in the ownership of the LLC as far as how things should be run, the operating agreement is what has been laid out and that's kind of the plan of the business going forward.

GC: So Tim, can a business owner handle this on their own? Or do they need an attorney to make sure they're doing everything the way they need to do it?

TJ: Yeah, there are actually several ways to form an LLC. And certainly, many states have made it really easy to do online with a couple of simple forms that you can kind of fill out and complete yourself. If you're not comfortable doing that, you can utilize a filing service to prepare and file the forms on your behalf, which oftentimes will save money over going to an attorney or other professional, and ensures it’s going to get done right the first time for you.

However, if you do have any legal or tax questions, we do always recommend that you at least consult with a professional first just to get those answered. And then you can either proceed to have the filing done by yourself, or to engage with the filing service to do it on your behalf.

GC: Finally, Tim, let's talk about long-term compliance. What are the ongoing responsibilities for an LLC?

TJ: Yeah, one of the nice things about an LLCs it does have fewer ongoing responsibilities than corporations do. Typically, most LLCs are subject to ongoing requirements in the state of incorporation or any of the foreign registration centers. And these typically include things such as filing and reports, which oftentimes is just simply updating information with the state so that the updated contact information, member information, address, those things are up to date. And then obviously paying any applicable annual report fees, franchise taxes, those kinds of things.

While it's recommended you hold regular meetings with the LLC, as far as the ongoing business that's being done and how it's going to operate. You're not necessarily required to do those things. You don't need to document those, which in a corporation, you do have to hold those regular meetings. So, from the perspective of the responsibilities and what needs to be done from an ongoing standpoint, there are fewer things that have to be done with an LLC, which again, is one of the reasons that it has become so popular because there's less to do for the owners.

GC: And Tim, I think we should point out that there is a particular group of experts we know who can help folks along with this process if they need assistance. And that's you and your colleagues at CT Corporation. In fact, it's one of the specialties at CT Corporation, correct?

TJ: That is correct. CT can definitely handle any of the questions that you may have. If you're just thinking about getting this going. We can certainly assist with any filing needs that you have. And as I mentioned earlier, with a Registered Agent, CT also provides Registered Agent service for those customers that need it. So, whether it be informational, need assistance with filing, or other Registered Agent services, CT is there to help you with any of those needs you may have.

GC: Tim great information. As always, I always enjoy our conversations. And I'm confident that many of our listeners learned some important details about LLCs today. Thanks so much for your time.

TJ: Thank you so much, Greg.

GC: Tim Jensen is manager of customer service for CT Corporation. I'm Greg Corombos, and for more information on this subject, please call CT at 844-787-7782.

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