Nolo's Quick LLC: All You Need to Know About Limited Liability Companies
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About this ebook
LLC expert Anthony Mancuso clearly explains how to decide whether an LLC is right for you. Learn:
- the unique legal features of LLCs, including limited personal liability for owners
- who should—and who shouldn’t—form an LLC
- when to choose an LLC instead of a corporation, partnership, or other business form
- how LLCs are taxed
- how to manage multiple-owner LLCs, and
- why an LLC can be the right choice even for a debt-troubled business.
Anthony Mancuso
Anthony Mancuso is a corporations and limited liability company expert. A graduate of Hastings College of the Law in San Francisco, Tony is an active member of the California State Bar. Tony writes books and software in the fields of corporate and LLC law and has studied advanced business taxation at Golden Gate University in San Francisco. He also has been a consultant for Silicon Valley EDA (Electronic Design Automation) and other technology companies. He is currently employed at Google in Mountain View, California. Tony is the author of many Nolo books on forming and operating corporations (profit and nonprofit) and LLCs. Among his current books are The Corporate Records Handbook; How to Form a Nonprofit Corporation; Incorporate Your Business; Form Your Own Limited Liability Company; and LLC or Corporation? His books and software have shown over 500,000 businesses and organizations how to form and operate a corporation or an LLC. Tony is a licensed helicopter pilot and guitarist.
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Reviews for Nolo's Quick LLC
7 ratings1 review
- Rating: 5 out of 5 stars5/5This book is a GREAT introduction to understanding the issues surrounding Limited Liability Companies (LLCs), and whether, or not, you should set one up yourself.My wife and two sisters just inherited a house and rather than sell, are deciding to rent it out. An estate lawyer said "you should probably set up as an LLC" to which we all said ... "huh?" Well this book thoroughly answered our "huh?" The author quickly and explicitly states that this work is NOT meant to be used to set up an LLC. What it does do is bring great clarity to those of us at ground zero in understanding and decision making about proceeding to set up an LLC.As a bonus to explaining the ins and outs of LLC's, chapter 2 (The LLC vs. Other Business Structures) is a veritable introductory text on corporate structures, such as sole proprietorships, general partnerships, S corporations, and RLLP's (I'd never even heard of an RLLP which means "Registered Limited Liability Partnership").Appendix B consists of a sample operating agreement, the sort of thing I find brings some real world clarity to these kinds of business issues. Appendix C gives a basic "Checklist for forming a basic LLC" which serves to clarify issues as well.This work is excellent at pointing readers to more appropriate, in-depth resources. Two such are the author's other NOLO works, Form Your Own Limited Liability Company and Your Limited Liability Company: An Operating Manual. I confess to not having seen either of these works, but intend to seek them out based on this book. Disclaimer: The author of this review received a free review copy of this book via the Amazon Vine program.
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Nolo's Quick LLC - Anthony Mancuso
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12th Edition
Nolo’s
Quick LLC
All You Need to Know About
Limited Liability Companies
Attorney Anthony Mancuso
Logo: NoloTWELFTH EDITION
FEBRUARY 2023
Editor
JANET PORTMAN
Cover Design
SUSAN PUTNEY
Book Design
SUSAN PUTNEY
Proofreader
MARTHA C. BENCO
Index
ACCESS POINTS INDEXING
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SHERIDAN
ISSN: 1932-1740 (print)
ISSN: 2375-2858 (online)
ISBN: 978-1-4133-3052-6 (pbk)
ISBN: 978-1-4133-3053-3 (ebook)
This book covers only United States law, unless it specifically states otherwise.
Copyright © 2000–2023 by Anthony Mancuso. All rights reserved. The NOLO trademark is registered in the U.S. Patent and Trademark Office. Printed in the U.S.A.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without prior written permission. Reproduction prohibitions do not apply to the forms contained in this product when reproduced for personal use. For information on bulk purchases or corporate premium sales, please contact [email protected].
Please note
Accurate, plain-English legal information can help you solve many of your own legal problems. But this text is not a substitute for personalized advice from a knowledgeable lawyer. If you want the help of a trained professional—and we’ll always point out situations in which we think that’s a good idea—consult an attorney licensed to practice in your state.
Acknowledgments
A special thanks to all the editors at Nolo for their assistance in helping me produce another self-help law business resource.
About the Author
Anthony Mancuso is a California attorney and a corporations and limited liability company expert. He graduated from Hastings College of the Law in San Francisco, is a member of the California State Bar, writes books and software in the fields of corporate and LLC law, and has studied advanced business taxation at Golden Gate University in San Francisco. He also works as a technical writer and is employed by Google. He is the author of many Nolo books on forming and operating corporations (both for-profit and nonprofit) and limited liability companies. His titles include Incorporate Your Business: A Legal Guide to Forming a Corporation in Your State, How to Form a Nonprofit Corporation (national and California editions), Form Your Own Limited Liability Company, The Corporate Records Handbook: Meetings, Minutes & Resolutions, LLC or Corporation? How to Choose the Right Form for Your Business, and Your Limited Liability Company: An Operating Manual. His books have shown more than a quarter of a million businesses and organizations how to form a corporation or LLC. He also is a guitarist and licensed helicopter pilot.
Table of Contents
Introduction
Should You Consider Forming an LLC?
How to Use This Book
What This Book Doesn’t Do
Legal and Tax Experts
Other Nolo LLC Resources
1An Overview of LLCs
Number of Owners (Members)
Limited Personal Liability Protection
Flexible Capital Structure
Flexible Distribution of Profits and Losses
Pass-Through Income Taxation of Profits and Losses
Flexible Management Structure
Exceptions to Owners’ Limited Liability
Basics of Forming an LLC
2The LLC Compared to Other Business Structures
What Is a Sole Proprietorship?
What Is a General Partnership?
What Is a Limited Partnership?
What Is a C Corporation?
What Is an S Corporation?
What Is an RLLP?
The Series LLC
Do-Good LLCs and Corporations
Deciding Between an LLC and Another Business Type
Business Structures Comparison Table
3
Members’ Capital and Profits Interests
LLC Capital Interests
Tax Considerations of Start-Up Capital
Converting an Existing Business to an LLC
Profit and Loss Interests
Special Allocations of Profits and Losses
4Taxation of LLC Profits
Pass-Through Tax Treatment
How LLCs Report and Pay Federal Income Taxes
LLC Owners and Self-Employment Taxes
An LLC Can Elect to Be Treated as an S Corporation
5LLC Management
Member Versus Manager Management
Legal Authority of LLC Members and Managers
Member and Manager Meetings
Member and Manager Voting Rights
6Starting and Running Your LLC: The Paperwork
Paperwork Required to Form an LLC
Securities Filings
7Getting Legal and Tax Help for Your LLC
Getting Legal Help
Getting Tax Help
Appendixes
AState Information
Business Entity Filing Office
Tax Office
Securities Office
BSample Operating Agreement
A. Preliminary Provisions
B. Membership Provisions
C. Tax and Financial Provisions
D. Capital Provisions
E. Membership Withdrawal and Transfer Provisions
F. Dissolution Provisions
G. General Provisions
H. Signatures of Members and Spouses of Members
CChecklist for Forming an LLC
Index
I
Introduction
Should You Consider Forming an LLC?
How to Use This Book
What This Book Doesn’t Do
Legal and Tax Experts
Other Nolo LLC Resources
The limited liability company (LLC) is an ownership structure that combines the best features of the corporation and the partnership. It gives small business owners corporate-style protection from personal liability while retaining the convenient pass-through income tax treatment enjoyed by sole proprietorships (the legal term for one-person businesses) and partnerships.
Protection from personal liability—often referred to as limited liability
—means that creditors of the business cannot normally go after the owners’ personal assets to pay LLC debts and claims arising from lawsuits; pass-through tax treatment means that business profits are reported and taxed on the individual income tax returns of the business owners. I’ll discuss limited liability and pass-through taxation in much more depth in Chapter 1.
Most of the 50 states and the District of Columbia make it easy, convenient, and even relatively economical for small business owners to create and register an LLC. For these reasons, more and more entrepreneurs are choosing to organize their businesses as LLCs. Three relatively recent developments have added fuel to the LLC fire:
Tough economic times have made it more important than ever for business owners to limit their liability for business debts, either by forming an LLC at the start or by converting an existing sole proprietorship or partnership to an LLC. If an LLC falls behind on its bills, creditors know that their only legal remedy is against the business, not against the owner personally. This gives creditors a strong incentive to work with the owner to settle outstanding accounts. Even if the worst-case scenario comes to pass and the business fails, at least the owner won’t be personally liable for its debts.
Sole business owners can form single-owner LLCs (called single-member LLCs, or SMLLCs). This means that people who have done business in the past as sole proprietors (or who are just starting out) can protect their personal assets from business debts and claims by filing simple paperwork and forming an LLC.
The IRS allows LLCs (including single-member LLCs) to choose between pass-through taxation and corporate tax treatment. Although most LLC owners will decide to stick with pass-through tax status (paying tax on their individual income tax returns), an existing LLC can elect to be taxed as a corporation, splitting business income between the business and the owner’s personal income tax returns, which can lower overall business income taxes. Although not a common strategy, as you’ll see in Chapter 4, income splitting might make sense for LLCs that make more than the owners want to take out of the business, or that need to retain substantial profits on a regular basis.
Should You Consider Forming an LLC?
Forming a new business as an LLC is an easy, quick, and relatively inexpensive process, as is converting an existing sole proprietorship or partnership to an LLC. But does it make sense for you to form your new business as an LLC—or to convert your existing business? Unless you have already incorporated or you run a microbusiness that has little chance of incurring uninsured debts or liabilities, my general answer is yes, you should seriously consider forming an LLC. Here’s why: In exchange for a relatively small amount of work and expenditure of time, you receive a big legal benefit—your personal assets are protected from business debts and claims (and your taxes won’t become more complicated).
A few examples help to illustrate when it does and doesn’t make sense to form an LLC.
EXAMPLE 1: Sam sets up a music store to sell guitars, keyboards, and musical accessories. Because members of the public will enter his retail space, Sam has some potential legal exposure (slip-and-fall lawsuits, for example). In addition, he knows that it’s easy to become enmeshed in contract disputes with suppliers and customers (for example, buyer’s remorse can often set in shortly after the purchase of a pricey guitar or synthesizer). Even though Sam will carry a reasonable amount of commercial liability insurance and do his best to keep his customers satisfied, he decides that it makes sense to file LLC articles of organization with his state for a $125 fee, so he can take advantage of the extra personal security that limited liability protection affords. Sam’s state, like many others, also charges a $50 annual report fee each year, but aside from this small expense and the few minutes it takes to complete the simple one-page annual filing form, very few added costs or burdens are associated with doing business as an LLC. And Sam knows that by forming an LLC instead of operating as a sole proprietor, he won’t get a different tax status, as he would if he elected to form a corporation (the other legal entity that provides owners with limited personal liability for business debts).
EXAMPLE 2: Stella and Vera have operated a pet grooming business from rented quarters in a strip mall for several years. Their partnership has been successful, and they’ve managed to increase their profits every year. Of course, there have been small problems with the occasional fussy pet owner—they were sued once in small claims court for a poodle dye-job that went slightly awry—but they’ve had no big lawsuits or other major legal hassles. However, as profits have grown, so too have the owners’ worries about their business. They are a lot busier than they used to be, and have had to hire several employees. They know that although their employees are well trained, expensive mistakes can happen, especially when new people come on board. Stella and Vera have also begun to worry about employee lawsuits. If the owners have to fire someone, will the employee go quietly or hire a lawyer and make their lives miserable for a while?
Because of these concerns, Stella and Vera decide to turn their partnership into an LLC. They do this by filing a one-page Conversion of Partnership to an LLC form, provided by their state. The filing fee is small, and they still file taxes as if they were a partnership (each owner continues to report and pay taxes on her share of business profits on her 1040 individual income tax return, and the business continues to file IRS Form 1065, an informational tax return for partnerships). Now both Stella and Vera rest a little easier at the end of each pet-grooming day, knowing that they won’t be personally liable for any legal problems they face in the future of their business. Of course, because the assets of their business remain at stake (as opposed to their personal assets), Stella and Vera will continue to choose and train their employees carefully.
CAUTION
Not all states provide a form for converting from a partnership to an LLC. In states that don’t provide a conversion form, partners file regular articles of organization to create their LLC. In some states, they also have to publish a notice in a local newspaper that they are terminating their partnership. I discuss these requirements in Chapter 6.
EXAMPLE 3: Winston is a graphic artist, sitting 40 hours per week as an employee in his well-lit cubicle, churning out computer art for a software publishing firm. He yearns for the day when he can work for himself in his own computer-graphics business. Rather than just quit his day job cold turkey, Winston starts his new business by working from home in the evenings and on weekends doing 3-D animation. Winston does most of his projects on a work-for-hire basis for Bill, a good friend of Winston’s and an entrepreneur who recently started a video game software company. Winston likes the fact that his animation work is fun, but he loves the fact that he can bill his services at an hourly rate that is twice what he makes at his day job.
Winston has heard about the advantages of forming an LLC, but he decides not to form one for his moonlighting business, at least for the time being. His reasons are:
He doesn’t feel that his sideline business exposes him to personal liability, because he works at home, under the terms of a very basic work-for-hire agreement with Bill, who pays Winston’s invoices on time every time.
He is too busy with his regular job and his new business to handle the legal and practical tasks that come with doing business as an LLC.
Winston’s decision is a sensible one. Even though converting a sole proprietorship to an LLC isn’t difficult, Winston doesn’t need to take this step yet. If Winston continues to operate as a sole proprietor (as most freelancers do), he doesn’t need to keep his personal funds and business funds separate. If Winston were to form an LLC, he would need to keep his personal funds separate from his business funds (to be sure that a court will respect the separate legal existence of his LLC and its limited liability protection). And, if he decides to stop moonlighting, all he has to do is stop working. Forming an LLC, no matter how easy, will make Winston’s business life more formal, and if he goes on to something else, he will have to officially dissolve his LLC. This is a little more trouble than just doing business as a sole proprietorship.
Now, let’s look at an example that shows how it might make sense to choose a corporation instead of an LLC.
EXAMPLE 4: Bill, Winston’s only client, has just started his own video game software venture, as mentioned in the above example. Bill’s plans are big—he hopes to hire a crew of programmers from the local college, then turn them loose to create the latest in 3-D video game software. He can’t pay his software team much to start, but he thinks he can convince them of the profit-making potential of the enterprise, particularly if one of the company’s software offerings gets licensed by one of the big video game companies. He’s sure his company has a good chance of success, but he also wants to limit his personal liability in case something goes wrong (for instance, if his company folds while owing money to creditors).
Bill considers forming an LLC, but decides to form a corporation instead. The corporation will give him