The decision to form a corporation, partnership or a limited liability company is fact-intensive and specific to the needs of each client. However, LLCs offer the most flexibility for tax and non-tax reasons. For this reason, the LLC is often the default choice of entity for a variety of purposes.

In this blog series, we will explore the benefits, types, and formation of limited liability companies. From there, we will take an in-depth look into the Operating Agreement and the formalities that must be observed to keep your LLC in good standing. Lastly, we will discuss the various uses of the LLC.

BENEFITS

LLCs are hybrid entities of corporations and either partnerships or sole proprietorships. As such, LLCs possess unique characteristics:

Single-level/pass-through taxation: A corporation is taxed at both the corporate level and the shareholder level. An LLC is taxed only at the member level.
Simplicity: An LLC can be set up rather quickly, with minimal paperwork.
Limited liability protection: If done properly, this “shield” limits the risk of loss to the assets of the company and protects the personal assets of the members.

TYPES OF LLCs

The flexibility of the LLC means that it can come in many varieties and has many different uses. Here are a few of the different flavors LLCs can come in:

Domestic: An LLC that is authorized to conduct business within the state it is formed.
Foreign: An LLC that does business in a state that it is not organized in must register to properly conduct business within that state.
Single-Member: An LLC with only one member.
Multi-member: An LLC with more than one member.
Series: An LLC that partitions debts and rights among distinct sub-units called series, alleviating the need for multiple LLCs. It is only permitted in certain states.
Member-managed: An LLC in which governance and business decisions are managed by the members.
Manager-Managed: An LLC in which governance and business decisions are managed by the manager or managers. The manager need not be a member.

FORMATION

Forming an LLC is straightforward and has none of the complexity (and paperwork) required by C-Corporations and S-Corporations. Follow the three step process below and you are in business (from a legal standpoint at least)…

Step 1: File Articles of Organization with the Secretary of State.

In Wisconsin, this is done with the Department of Institutions. The form can be found here. In Wisconsin, you will need to have the following:

Registered Agent and Office: someone who can accept service of process and other official communications on the LLCs behalf. Typically, this is an attorney, but it does not have to be.
Management: Will the LLC be managed by its members or by a manager. The manager does not have to be a member of the LLC.
Organizers: The name and address of each person who signs and delivers the articles to the Department of Financial Institutions.
Drafter: The person completing the application.
Signature: The articles must be signed by at least one of the organizers.
Contact: The contact information for the person completing the application.
Payment of the fees: In Wisconsin, the cost is currently $130.00.

Step 2: Obtain an EIN.

After the Articles of Organization are filed and accepted with the State, the LLC should obtain an Employer Identification Number from the IRS. This is like a Social Security Number for the LLC. While it is not required, it is a good idea if you plan on opening a business bank account.

Step 3: Draft and Execute the Operating Agreement.

The Operating Agreement serves as the internal document governing the operation of the LLC. It sets forth the expectations of the members and/or manager, sets forth how decisions will be made, buy-out processes, capital call procedures, and other pertinent provisions governing the LLC.

If there is not an operating agreement, the LLC is governed by state statute. I have described why this may not be ideal in a previous post. In any event, this is where a lot of entrepreneurs cut costs. But I implore you to consult and/or hire an attorney.

I know it is tempting to download a form from the internet, but that is like trying to perform open heart surgery on yourself. Unless you are a trained surgeon, you do not know what to keep and what to throw away. And God forbid you end up in court, your operating agreement will be front-row center before a judge and/or jury.

CONCLUSION

The LLC offers great flexibility and simplicity as a choice of entity. It offers a number of benefits and is very straight-forward. But do not let its simplicity fool you. There are a number of traps for the unwary (read: Operating Agreement). Through this series, we will help you navigate the pitfalls of the LLC so that your business has the protection it needs.

Are you thinking of forming a new business? Or do you have an LLC and would like to make sure it is in good standing? Contact DeVougas Law Group for a free 15-minute consultation.

[Disclaimer: Nothing in this article constitutes legal advice. Please contact us in order to determine the appropriate course of action for your particular situation.]