Limited Liability Companies for Dummies

Jennifer Reuting founded InCorp Services, a corporate structuring firm specializing in LLCs, in 2001. It is currently the fourth largest national registered agent service provider in the country, with thousands of clients nationwide and offices throughout the U.S.

Introduction 1

About This Book 1

Foolish Assumptions 2

Icons Used in This Book 3

Beyond the Book 4

Where to Go from Here 4

Part 1: The ABCs of LLCs 7

Chapter 1: What is an LLC, Really? 9

Understanding How LLCs Work 10

Owners: You gotta have ’em 11

Contributions: Where the money comes from 12

Allocations and distributions: Getting what you’re due 13

Management: Some folks are just better at it 14

Creating Your Own LLC: Your First Step Toward Success 15

Educating yourself 16

Divvying up the ownership 16

Deciding who manages 17

Choosing your registered agent 18

Bringing your LLC into existence 19

Operating Your LLC 19

Creating your operating agreement 20

Keeping books and records 20

Paying taxes 21

Chapter 2: LLCs: More Handy Than Duct Tape! 23

Understanding Why LLCs are Awesome 24

Protecting your personal assets 24

Taking charge of charging order protection 26

Enjoying the flexibility of management and ownership rules 28

Choosing your own tax status 30

Distributing profits at your whim 31

Taking a Look at a Few Wrinkles 32

Membership can be a bit tricky 32

Rules governing LLCs vary among states 33

Discovering the LLC’s Many Variations 34

The professional LLC 34

The series LLC 38

The family LLC 42

The low-profit LLC 42

The single-member LLC 44

Chapter 3: Determining Whether an LLC is Right for You 45

Knowing Your Options: Other Business Structures 46

Going it alone: Sole proprietorships 46

Adding a partner: General partnerships 49

Throwing in a little legal protection: Limited partnerships 50

Meeting the black sheep of the partnership family: LLPs and LLLPs 51

Separating yourself from your business: Corporations 52

Easing the tax burden: S corporations 55

Getting Personal: Using an LLC to Achieve Your Goals 56

Running a small business 57

Raising capital for your business 61

Maximizing real estate investments 63

Planning your estate 65

Protecting your personal assets 67

Part 2: Your First Steps: Forming Your LLC 69

Chapter 4: Playing — and Winning — the Name Game 71

Establishing the Best Name for Your LLC 71

Considering naming guidelines 72

Letting the ideas fly 73

Following naming law 74

Determining the Availability of a Name 75

Checking names in your state 75

Getting the name you want with a DBA 76

Conducting a trademark search 77

Going global 78

Protecting Your Name 78

Registering your domain 79

Reserving your name 79

Getting a trademark for your name 80

Completing Your Identity with a Logo 84

Changing Your Name 85

Chapter 5: Choosing the Best State for Your LLC 87

Your State or Not Your State, That is the Question 88

Considering another state for your LLC 88

Forming your LLC in your home state 89

Looking for LLCs out of state 91

Exploring Tax and Privacy Havens 91

Nevada: Clinging to its heyday 92

Wyoming: The birthplace of LLCs 92

South Dakota: Getting serious 93

Delaware: The heavy hitter with the chancery court 93

Working with a State-Required Registered Agent 94

Why you need a registered agent 94

What your agent should do for you 95

How to find an agent 97

Chapter 6: Creating and Filing Your Articles of Organization 99

Making a Few Big Decisions 100

Choosing the initial members 101

Deciding how you want your company to be managed 102

Preparing Your Articles 105

Meeting your state’s requirements 106

Putting it all together 110

Choosing who signs 110

Filing Your Articles 111

Dotting your i’s and crossing your t’s 112

Sending it off 112

Dealing with a rejected filing 114

Considering Formation Companies 115

Chapter 7: Converting Your Current Business into an LLC 117

Considering Conversion to an LLC 118

Navigating the Tax Minefield 119

Converting from a sole proprietorship 120

Converting from a general or limited partnership 121

Converting from a corporation 123

Executing the Conversion 125

If your state allows statutory conversions 126

If your state doesn’t allow statutory conversions 129

Tying Up Loose Ends After the Conversion 130

Getting around the contractual stuff 131

Transferring your assets 132

Dissolving your old entity 132

Part 3: Structuring Your LLC 135

Chapter 8: Tell Uncle Sam How It is! Choosing How You Want to Be Taxed 137

Getting to Know the Tax Types 138

Partnership taxation 138

Disregarded entity taxation 142

Corporation taxation 143

S corporation taxation 145

Notifying the IRS of Your Election 147

Applying for your tax identification number 147

Making the tax election: Filing Form 8832 148

Chapter 9: Make It Official! Getting Started on Your Operating Agreement 151

What is an Operating Agreement? 152

What the operating agreement governs 152

Why you need an operating agreement 154

Establishing Your Framework 156

Achieving A+ form and structure 156

Building your outline 157

Drafting Basic Provisions 158

Laying out organizational matters 159

Giving specifics on company records and reporting 161

Getting the boilerplate provisions out of the way 163

Addressing the other stuff 166

Chapter 10: Structuring Your Partnership 167

Understanding the Terminology: Members, Interests, and Certificates 168

Locating and Recruiting Key Partners 168

Finding the yin to your yang 169

Easy tiger! Don’t let excitement cloud your judgment 169

Getting the good ones on board 170

Issuing the Membership 171

Naming the initial members and their contributions 173

Understanding some complexities of member contributions 174

Determining profit and loss distributions 175

Establishing membership classes 178

Deciding on how the members decide 180

Making Folks Earn Their Share: Membership Vesting 182

Deciding on a fair vesting schedule 183

Understanding membership cliffs 183

Avoiding common tax pitfalls 184

Setting Up a Single-Member LLC 185

Keeping your SLLC’s liability protection 185

Creating an operating agreement for an SLLC 186

Setting Up Rules for Managers 187

Outlining the Basics 187

Electing the Managers 188

Delegation of Powers 189

Compensation 190

Chapter 11: Using Your LLC to Attract Investors 191

Structuring Your LLC to Attract Investors 192

Appeasing the SEC with an LLC 193

Seeing how the laws apply to you 194

Exploring securities registration exemptions 196

Flying through State Securities Laws (Blue Sky Laws) 200

Chapter 12: Doing the Membership Shuffle 203

Investigating Intricacies of LLC Membership Interests 204

Determining the value of the membership interest 204

Transferring membership 205

Using transfer restrictions to your advantage 206

Preparing Now for an Easy Transition Later 207

Parting on peaceful terms 208

Removing a member 208

Dealing with the death of a member 210

Creating individual buy-sell agreements 211

Executing the Transition 213

Making room for new members 213

Giving old and new members their fair share 214

Wrapping Up the Operating Agreement 215

Signing and Ratifying 215

Sharing the copies and storing the original 216

Amending the operating agreement 216

Part 4: Running Your Brand-New LLC 217

Chapter 13: Maintaining Your Records (And Your Sanity) 219

Filing Your Initial Report 220

Getting to know your state requirements 220

Keeping your company current 221

Paying to Play: Business Licenses 222

Acquiring state, city, and possibly county business licenses 222

Applying for a sales and use tax permit 223

Following special licensing requirements 224

Meeting Other Pertinent Requirements 228

Federal tax identification number 228

Workers’ compensation insurance 228

(Record) Keeping Your Liability Protection 228

Documenting your decisions with resolutions 230

Creating a company kit 231

Creating and maintaining a membership roll 232

Tracking tax filings and financial information 232

Chapter 14: Making Cents of Taxes 233

Reviewing the Tax Types 234

Disregarded entity taxation 234

Partnership taxation 234

Corporation taxation 234

S corporation taxation 235

Filing Your Federal Returns 235

Sucking it up with sole-proprietorship status 236

Ponying up with partnership taxation 236

Coughing up cash with corporation tax status 239

Shelling it out with S corporation tax status 240

Avoiding LLC Tax Traps 241

Transferring assets into your LLC 241

Dealing with phantom income 241

Minimizing self-employment taxes 243

Chapter 15: Expanding Your Empire: Going National! 245

Registering Your LLC in Multiple States 246

Defining “doing business” 246

Foreign-filing to do business in multiple states 248

Maintaining Your Multi-State LLC 250

Working with a formation company to track your filings 250

Submitting initial reports 251

Obtaining business licenses 251

Paying taxes 252

Withdrawing from a state 253

Changing your home state 253

Chapter 16: Dissolutions: Every Beginning Has an End 255

Getting Clear on the Context 256

It’s Melting! Examining the Reasons Your LLC May Dissolve 256

Voluntary dissolutions: Even the mighty fall 257

Administrative dissolution: The state giveth and the state taketh away 258

Judicial dissolutions: When the gavel strikes 258

Tax terminations: ’Cause the IRS says so 260

Fictional dissolution: A bureaucratic hassle 261

Considering the Future Before Calling It Quits 263

Keeping your LLC on life support 264

All in favor? Taking the vote 264

Planning for the future 265

Undergoing the Dissolution Process 266

Settling your debts: Paying creditors 267

Giving each his due: Paying members 269

Wrapping up the government affairs 270

Making it official: Filing the dissolution 271

Dealing with the tax consequences 272

Following the dissolution checklist 272

Part 5: LLCs On Steroids: Advanced Strategies 275

Chapter 17: Using LLCs to Cover Your Assets 277

Knowing the Dangers: What Can Happen without LLC Protection 278

Lawyers and creditors come calling 279

The IRS stakes a claim 280

Liens are lurking 280

Getting the Best Asset Protection with LLCs 281

Setting up a Fort Knox for your personal assets 282

Taking charge of charging order protection 283

Remembering that even charging order protection comes with rules 286

Exploring Strategies for Increased Security 288

Electing a nominee to protect yourself with privacy 289

Setting up multiple LLCs: The more, the merrier! 290

Following the dual-entity strategy 291

Protecting your family with the family LLC 292

Chapter 18: Protecting Real Estate with LLCs 295

Comparing LLCs to Other Possible Real Estate Entities 296

Holding real estate in corporations: The worst choice 297

Falling short with land trusts 298

Looking at LLC Property Logistics 301

Deciding which state to form in 301

Getting lenders to loan to an LLC 303

Transferring the title 304

Part 6: The Part of Tens 305

Chapter 19: Ten Good Reasons to Form an LLC 307

To Customize Your Small Business 308

To Protect Real Estate Assets 308

To Shield Intellectual Property 309

To Raise Seed Capital for Your Business 310

To Plan Your Estate 311

To Do a Short-Term Project 312

To Segregate Assets 312

To Minimize Your Tax Burden 313

To Change the Profit Distributions 314

To Protect Your Personal Assets 314

Chapter 20: Ten Ways to Keep Your Liability Protection Intact 317

File the LLC Properly 318

Find a Partner 318

Create an Operating Agreement 319

Capitalize the Company 320

File Your Annual Reports 321

Hold Member Meetings Regularly 321

Obtain Your Licenses and Permits 322

Avoid Commingling Funds and Assets 323

Sign Your Documents Correctly 324

Give Up Some Control 324

Glossary 325

Index 331

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