HOW IS AN LLC FORMED?
Limited Liability Companies (LLCs) are business entities formed at the state level. Each state has its own set of laws, rules, and regulations that dictate how LLCs: 1) are formed, 2) are generally run, 3) can or cannot do certain things, and 4) are dissolved.
HOW IS AN LLC STRUCTURED AND RUN?
While there are certain rules and best practices, LLCs can be set up and run in virtually any manner that makes sense for a particular business. The LLC is a fairly new type of entity that can be described as a cross between a corporation and a partnership, with the benefits of both. By its very nature, an LLC is designed to be very flexible. The state laws and rules that define LLCs are typically very broad – and purposefully so to allow for variation. The way an LLC is set up and the roles that the people involved occupy are usually defined by a contract (Operating Agreement) between the LLC and its Members. The obvious benefit of a fluid structure is that an LLC can be tailored to meet the exact needs of a specific business. The drawback is that, since the baseline laws are broad, the governing documents (e.g. Operating Agreement) must be very specific and specially tailored to each business and situation to avoid surprises.
HOW IS AN LLC TAXED?
An LLC’s flexibility carries over to its options for taxation. By default, an LLC with one owner is not taxed separately (income, costs, expenses, profits, and losses are reported on the single owner’s personal tax return). An LLC with multiple owners is taxed like a general partnership by default. When you form an LLC with your state and obtain an Employer Identification Number (EIN) from the IRS, you may also then file a ‘Check the Box’ election. This will give the LLC an option to be taxed as a C-Corporation or an S-Corporation. The election is made by properly completing and filing IRS Form 8832. Once accepted, your LLC will be taxed according to your choice on that form. Since this will have tax consequences, it is highly recommended that you speak with a Certified Public Accountant or a Tax Attorney before you do this.
CAN I CONVERT AN LLC INTO A CORPORATION?
Yes. States typically have mechanisms to convert one business entity type to another. Generally, converting from an LLC to a Corporation would not result in negative tax consequences, but this can vary depending on the specific scenario. Speak with a Certified Public Accountant or a Tax Attorney before you do this.
IF I FORM AN LLC IN ONE STATE, CAN I MOVE IT TO ANOTHER?
Yes. There are multiple ways to accomplish this, and every state will have its own mechanism and procedure.