An Insight into the Features of a Limited Liability Company

A limited liability company is a most popular business type with budding entrepreneurs and startups because it’s viewed by most as a solid entity that can withstand and survive the tremors associated with starting a business. The survival rate of startups is incredibly low, and it’s estimated that for every 20 startups only about 5, graduate to limited liability companies. Most small business people prefer LLCs because they offer flexibility regarding operations, and protection against liabilities, especially when it comes to taxes. And while regulations governing the formation of LLCs vary from state to state, there exist a variety of common features while incorporating LLCs that apply in most areas.

  1. Simplicity in Operation and DocumentationAn essential feature of an LLC is simplicity regarding operations and documentations. While existing as a separate entity an LLC possess limited liability and is flexible when handling tax returns. In many states, the requirement to hold an annual shareholder’s meeting has been relaxed. This has made the preparation and filing of minutes of meetings, not a mandatory requirement. This simplicity extends to top management where LLCs are not required to appoint a board of directors, unlike large corporations. The strict regulations that govern the management of records in large corporations are also relaxed in LLCs and less burdensome.
  2. Separate Legal ExistenceLLCs possess separate legal existence quite apart from its members. If a group of people come together and decide to run a business together, in an unincorporated union, they will simply remain a collection of persons who run a business and incur debts belonging to the firm. A limited liability company is a separate entity. It can hire employees. It can purchase and sell assets. It can sue and get sued. And although this varies from state to state, a typical feature is that even after a key member withdraws, it continues to exist.
  3. Flexible in TaxationThe Inland Revenue Service does not have a separate set of regulations for taxing LLCs. And hence the flexibility. They are taxed as either Partnerships, where members are many, sole proprietorships, where there is a single member, or corporations, in multi-member organizations. For businesses, members may choose to pay taxes either as a Chapter C corporation, or Sub-chapter S corporation. A chapter S-corp or a chapter-C-corp. This is special IRS coding and governs corporations. This flexibility grants members the freedom to choose the type of taxation that makes the best sense for the business.
  4. Enjoy Limited LiabilityA limited liability company, as the name suggests, grants limited liability to members. Where employees, managers, and other members are responsible for their civil wrongs, or misconducts, the limited liabilities member remains protected against civil wrongs committed by other colleagues, employees or managers. This special characteristic allows members to hire employees and perform high-risk business that would otherwise endanger the member’s assets when faced with litigation. In effect, members are not liable the liabilities and debts of the LLC.

How to Start a Limited Liability Company

Starting a limited liability company is not as difficult as some people imagine. Here are steps that will guide you and make your LLC a legal entity.

  • Select an available business name that will comply with the Limited Liability rules in your state. Make sure the name does not resemble another name in the area. It must end with an LLC for “Limited Liability Company” or Limited Company.
  • Hire an attorney to draft Articles of Association. This is a legal requirement. And it must be submitted to the state’s LLC filing office. Some states will call it “Certificate of Formation.” Others “Certificate of Organization.” Most literate entrepreneurs can draft their own Articles of Association. They are short and straightforward. A standard form exists where they require you to only fill in the blanks and checking boxes. Key features include the names and addresses of all owners. Where needed, all members will be required to sign, but some members designate one member to sign on their behalf.
  • File the Articles of Association accompanied by filing fees. This ranges from $100 to $800, depending on your location.
  • Create an LLC Operating Agreement
    This is an agreement that sets out rules and operations of the business. They must be filed at the State’s Limited Liability Company’s office. An LLC agreement will usually deal with crucial matters that form the core of the company, such as:
    – Drawings
    – Profits and Losses
    – Property ownership
    – Meetings and decision-making
    – New members admissions
    – Expulsion of errand members/retirement
    – Insurance and indemnities
    – Other covenants
  • Draft a Limited Liability Agreement with states the rights and responsibilities of each member.
  • Before opening for business, obtain local trading licenses and permits that the state regulators may demand. These may include zoning permit, business license, etc.
  • Publish a simple notice in the local newspapers announcing your intention to form a LLC
  • You will also be required to publish an Affidavit of Publication to the state LLC office. Most major newspapers have a desk that assists in this requirement.

Disclosure Requirements of a Limited Liability Company

Every Limited Liability Company is required to affix or paint its name outside every premise or office of the business, in clearly legible letters and a conspicuous manner. The LLC name must also appear, legibly, on all documents of activity including:

  1. Cheques, Invoices, and Receipts
  2. Business letters and all forms belonging to the LLC
  3. Notices and Publications
  4. Websites

The law requires that order forms, business letters and other documents of the LLC must also specify:

  • The registered number of the LLC, and place of registration
  • The address of the registered office
  • The letters LLC

If the LLC fails to comply with these requirements, it may attract statutory fines and penalties, for the LLC, all members in default.It’s also a requirement that LLCs provide financial information when called upon to do so. These includes:

  • Annual returns
  • Annual accounts
  • Notification of any changes including changes to registered office
  • Changes to any memberships, status, etc.

In conclusion, if wrongful trading is detected, and attributed to an individual member, particularly if the LLC is facing insolvency, or with a view to defraud members, the member may be held personally liable. Penalties could be potentially unlimited, and the guilty member may be forced to make appropriate contributions “as the court may deem proper.”

Is A Sole Proprietorship Right For You?

Of all the different forms of business, the sole proprietorship is the simplest. Because it is a one-person business, it isn’t constrained by the same regulations as larger corporations. If you have the next great concept and are motivated to chart your course with a carefully thought out business plan, you may well be on your way to business ownership. You needn’t have a grandiose plan that will consume your every waking hour. Sole proprietorships consist of freelancers, contractors, and consultants to name a few. Many of whom work their businesses in their spare time.

The ease of starting a sole proprietorship is much less taxing than if you owned a larger company and had to cut through miles of red tape. You don’t even have to go through state registration as larger corporations do. Some cities do not even expect registration of only owned and run companies.
A headache many companies endure with quarterly taxes can be skipped over since you are only required, in most instances, to fill out a simple 1040. You probably won’t need an accountant for this. Many tax programs, including Tax Act Online, will even guide you through losses and profits, self-employed tax assumptions and more.

The advantages of sole proprietorships are vast:

  1. Starting or stopping with ease. To start with you may purchase the tools or equipment needed to get you off the ground running. Mary Kay business owners usually purchase what is called the Cadillac kit for under $500. With simple word of mouth and a few business cards they quickly see the return on their investment. For others, it requires a simple small office lease or power tools. Not loving it? Want out? Stop. It’s that simple. Pack it up, store it and walk away. You don’t have to sell out to a partner or vote on it. You simply quit.
  2. You answer only to yourself. It’s so much easier to get motivated for the day when you know you’re doing this for yourself. Sure, there will be mistakes along the way, but you only have to face yourself. And the rewards are sure to be great along with the way.
  3. Enjoying the luxury of being your boss. There is no greater motivation than knowing it is your name at stake. To know that it is within your power to singlehandedly ensure your success is eating.
  4. The heritage you leave behind. Generations of people after you will continue to build on your dreams and your success.
  5. It’s all yours. Next to being your boss, nothing feels greater than knowing it is completely within your power to earn as much or as little as you choose. The best part of that equation? You share all your profits with – you and only you (minus only the cut your Uncle Sam will take, but hey…)
  6. Work when you want, where you want, how long you want. It is completely up to you how many hours you choose to put into your business or when you cut your losses and walk away. Sole proprietorship means you are in charge; you make the decisions, including how long you continue your business.
  7. Write-offs. Tax Act Online will walk you through these too. Business meals, office space, tools, mileage…the write-offs are virtually endless.
  8. The bottom line. Larger businesses have the responsibility placed on them to pay into workman’s compensation, unemployment, higher taxes. As a sole proprietor, you are only responsible for you and your taxes are taxed as your personal income. While you will have to pay quarterly, this is a small price to pay and far outweighs the cons of business ownership.
  9. Ask around. You can learn from others mistakes and successes by simply speaking with other business owners. Chamber of Commerce meetings is a great place to meet business owners and learn from their experience so that you are better equipped for success with your business.

What Are The Benefits Of Starting A Sole Proprietorship Business?

Unlike a corporate business, a sole proprietorship is the most manageable and easy to run. In the sole proprietorship, you are your boss and governing state regulations are not as rigid compared to other forms of businesses. To start your own registered business, all you need is a winning idea, a well-made business plan, and you’re good to go. Starting a sole proprietorship does not involve writing corporate bylaws or an inch solid business plan. If you’re a freelancer, consultant, baker, caterer, etc., you can start your own business in practically no time at all.

One major advantage of a sole proprietorship is the ease of tax regulations. Unlike a corporate business where you need to set up a separate tax form for the business alone, a single proprietorship business tax is your personal income tax already. You also don’t have to bother registering your business to multiple government regulatory offices. Some states even allow you to go into business first and register later.

A single proprietorship business tax can be taken care of by filing a 1040 form. You don’t have to bother filing a separate quarterly tax payment schedule like corporate businesses do. Your tax report doesn’t even have to be elaborate. You can just use online tax software such as Tax Act Online to compute your taxable income – and you’re entitled to all self-employed tax exemption benefits given by the government also.

Consider the following points to see if the sole proprietorship is the right business form for you.

  1. It’s easy to start, easy to stop. To start doing business, all you need are proper equipment, a comfortable office space, and fixtures perhaps, and you’re good to go. Many happy mothers doing business at home bought only the $500 Mary Kay kit to begin. Depending on your skills or business concept, you may just need a new oven and a power mixer to start selling wedding cakes from your kitchen. If you feel that the business is not working for you, then you stop. You don’t need to bother calling partners or batting heads in a conference room to dissolve the business. You simply pack up and leave.
  2. You owe nobody anything. For some people, they can perform well if they’re not worried about fulfilling obligations to other people. No matter what you do in your business, you get a peace of mind knowing that you don’t owe anyone an explanation regarding any outcome.
  3. You are your boss. Perhaps this is the greatest common to people to start a sole proprietorship business. If you own your source of employment, you don’t have a boss to suck up to. You can breathe easier knowing that you have full control over your destiny.
  4. You have a good legacy to leave your children. The benefit created by your business doesn’t have to end when you retire. You can leave the business to your children, which they can build on based on your legacy.
  5. You take home whatever you make. Did you ever get that feeling while working for somebody that his business will crumble without your help? And yet you don’t even get to take home the proper compensation you deserve. With your own business, you can take full control of your income; you can make as much or as little as you want; it’s up to you.
  6. Enjoy flexible hours and work arrangement. If you are your boss, it’s up to you if you want to work as much as 10, 8, or 2 hours a day, you only have yourself to answer. You can even work in your pajama if you want to; nobody cares if your office is your kitchen.
  7. Enjoy the tax write-offs. If you own your business, you get to enjoy the write-offs accorded to you and your business. Online tax software like the Tax Act Online can give you a full list of tax deductible items such as gas mileage, office equipment cost, representation expense, and more.
  8. Less responsibility. If you have fewer people helping you in the business, you don’t have to worry about giving them full benefits like medical and dental insurances; it’s all up to you if you want to give them these benefits. Unlike corporations also, you don’t have to worry about double taxation in a sole proprietorship. Although you still have to pay your quarterly income tax, you can skip long red tape by filing only one form; your 1040 form.

Now that you’re convinced that the sole proprietorship is the best business form for you, what’s there left to do? Start your own business! Brush elbows with other businessmen and women who started ahead of you and learned from their experience. Join the chamber of commerce meetings or business expos to get ideas for your next source of employment, the one with your name on the registration form.