The limited liability company (LLC) is a relatively new form of ownership having just been created in the mid-seventies. (They were authorized in California in 1994.) An LLC is a separate legal entity and provides, as the name implies, limited liability for the owners from the debts and liabilities of the business. It is a hybrid between a partnership and a corporation in that it combines the profit "pass-through" treatment of a partnership with the limited liability given to corporate shareholders. In California, the name of the company must contain the words "Limited Liability Company", "Ltd. Liability Co." or the initials "LLC" ("LC" is also an option in Massachusetts.)
An LLC is established by filing a document called Articles of Organization (or Certificate of Organization in Massachusetts) to your state's LLC filing office, generally the Secretary of State. The Articles specify the name of the company, the registered agent's name and address the purpose of the company, names and addresses of members and the organizers (typically the members and the duration. You can find templates for Articles of Organization in the business section of most large bookstores and on the websites of many states.
The owners of an LLC are called 'members'. In some states, an LLC can be owned by just one person. Other states require at least two owners. Ownership, voting rights, distribution of profits, and dissolution distributions are generally proportionate to the initial investment unless the Operating agreement specifies a different arrangement.
Members are not paid for their roles as members. They may however also serve as employees or officers of the LLC and consequently be paid for those roles. Members generally manage (run) the company. They may also designate a manager or team of managers to run the business instead. These designated managers may be members (owners) or not. For a small consulting company, adding a designated level of non-owner managers is probably not necessary. There is no requirement for regular meetings although members may call a meeting to talk about a specific topic. If this occurs, no decision can be made until the meeting is held.
In addition to the required Articles of Organization, an Operating Agreement is also recommended. Topics covered in this document include what happens when a member leaves the LLC and how members' capital contributions and distributions are to be handled. It also outlines, among other things, your decision making process, how additional capital will be obtained, whether the LLC will be managed by members or managers and names them, voting rights, required meetings, tax treatment, salaries for members actively running the business, and how and when the LLC will be dissolved. You will need to provide a copy of your operating agreement in order to open a bank account for the LLC.
The Operating Agreement for manager-run LLC is substantially the same as for member-run organizations with a few unique features. Managers may, but do not need to, call formal meetings to make decisions. Unlike members, managers may be compensated for serving as managers regardless of whether or not they actively work full-time for the LLC. The agreement may also include a 'term limit' for managers and procedures for their removal.
While an LLC is generally taxed as sole proprietorship or partnership, if the owners elect, it may file an Entity Classification Election form (IRS form 8832) and elect to be taxed as a corporation. If it is classified as a partnership, the members must be provided with a Partner's Share of Income, Credits, and Deductions (IRS Form 1065). All LLCs are subject to a minimum annual tax of $800 for the privilege of doing business in California and must pay the tax even if the LLC did not do any business in California.
Any member may obligate the business in a member-run LLC. If it is manager-managed, then only managers may make obligations on behalf of the LLC. As with a partnership, you will want to choose the members of your LLC with caution.
Limited liability is offered owners and managers of LLCs however, there may be personal liability for managers who make particularly bad or self-serving decisions. Additionally, personal guarantees made by an owner/member on behalf of the LLC remain the personal responsibility of the guarantor.
Any member may transfer his or her economic interest in the LLC without the approval of the other members. However, neither voting nor management rights may be transferred. The members may specify, in the Operating Agreement, to prevent the transfer of economic rights without their permission. If a members dies, resigns, is incapacitated, or goes bankrupt the state may require that the remaining members vote on the continued existence of the LLC. Some states require that the life of an LLC be limited to specific time period.
| Limited Liability Company | California | Illinois | Massachusetts |
| Initial State Filing Fees | $85 | $400 | $500 |
| Annual State Fees/Tax | Min $800 | $200 | $500 |
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