HOW TO…Keep Your Limited Liability Company Current
□ Draft an operating agreement to govern the operations of the company.
(A sample operating agreement is included in Appendix C.)
□ Keep the state informed if your registered agent moves or changes.
□ File your initial and annual reports where required.
An LLC offers the tax benefits of a partnership with the protection from liability of a corporation. Like a corporation, an LLC offers a business owner protection from the debts, obligations, and liabilities of the business. Unlike a corporation, LLCs are generally not required to have extensive corporate formalities, such as mandatory meetings and minutes. Unlike a limited partnership, members can participate in the operations of the business without jeopardizing their protection from liability.
An LLC is more flexible than an S corporation because it can have different classes of ownership, a flexible management structure, an unlimited number of members, and resident aliens as members. In addition, an LLC may create special allocations of profits and losses for the different classes of ownership. If the company decides they would like to operate as a corporation later on, it can convert to a corporation tax-free under IRS Code Section 351, with the LLC members exchanging their membership units for stock in a corporation.
Formation costs for an LLC are comparable to a corporation, but because an operating agreement needs to be drafted to allocate profits and losses of the LLC among the members and define control, extra costs may be incurred. Another disadvantage of an LLC is that all profits and losses are deemed distributed pro rata to members for tax purposes on the last day of the tax year, even though many companies need to retain some funds to meet their current expenses. As a result, some owners can be charged with income they have not actually received. Most well-drafted operating agreements provide for a mandatory tax distribution to cover the taxes due on the phantom income. Like a corporation, there is the remote possibility that members of an LLC may be held personally liable for the debts and obligations of an LLC. These cases are rare and are generally the result of the members disregarding the formalities of the entity and committing a fraudulent act that gives rise to personal liability.
