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CorpNet’s Guide to:
FORMING AN LLC
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Table of Contents
03 Exciting Next Steps
04 Introduction
05 Benefits of an LLC
Member-Managed and
06 Manager-Managed LLCs
07 Tax Treatment
08 LLC vs. C Corporation
09 LLC vs. S Corporation
10 Comparing Business Structures
What about LPs, FLPs, PLLCs
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and LLPs?
12 Where to File?
15 About CorpNet
16 Our Services
Exciting Next Steps!
Congratulations on taking the next step in your new business journey! When you are
working for yourself, you have the opportunity to reap the rewards of your efforts while
exercising greater control over how you spend your time. In addition, you will make the
decisions that impact your future.
When it comes to your new business, one of the first decisions you will make is what legal
form your business should take. If you have not thought about this yet, now is the perfect
time. But not considering your options (like an LLC) and making a selection, you default to
a sole proprietorship. While you will not be alone in that regard, you may be missing out
on many benefits afforded by creating a separate business entity. Additionally, you may be
exposing yourself to personal liability.
Many business owners avoid creating a distinct legal entity because they believe the
process is costly. Not taking those steps, however, may be the costliest decision of all in
the long run. Using an experienced document filing service, such as CorpNet, can keep
initial costs to a minimum.
Using an online filing service such as CorpNet ® is a great way to get started. By having
our team of experts file all the necessary entity formation paperwork, you can save both
time and money. We are fast, reliable, affordable, and our services are backed by a 100%
satisfaction guarantee.*
03
An Introduction to
Limited Liability
Companies
A Limited Liability Company (LLC) is a legal entity
that bears similarities to both corporations and
partnerships. An LLC is not a corporation; it is
formed under specific state statutes that provide
for the creation and regulation of this special type
of business structure that has come to be
commonly used and respected in business. An
LLC can be used to combine the limited liability
features of a Corporation with the flexibility and
tax benefits of a partnership.
Owners of an LLC are generally known as
“members.” Management and control of the
entity resides with the members unless otherwise
provided in the formation documents.
While an LLC does require the filing of Articles of
Organization and the adoption of an Operating
Agreement by its members, CorpNet document
filing service can provide you with the assistance
you need to meet these requirements with
minimal investment of your valuable time and
money.
Using CorpNet can save you both time and
money with service that is fast, reliable and
affordable. And remember, our services are
backed by a 100% satisfaction guarantee. We
make everything easy for you so that you can
focus on what you do best – running your
business!
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Benefits of an LLC
Limited Liability
Like a Corporation, owners of an LLC enjoy limited liability, which protects their
personal assets from judgments and other obligations of the entity. If the LLC
incurs debts or liabilities, the creditors are limited to the assets of the LLC. In the
event the assets are insufficient to cover the debts of the business, creditors may
not generally collect additional amounts from the members. By contrast, a sole
proprietor is personally liable for all the obligations of the business. This means
that sole proprietors risk everything they own to satisfy the debts or judgments
of their respective businesses, including their homes, cars, and personal savings
and investments.
Fewer Formalities Required
An LLC also typically requires fewer corporate formalities, such as regular
meetings of a board of directors and an annual meeting of shareholders, than
either an S or C Corporation. LLCs do, however, require the filing of Articles of
Organization to be properly formed, and the members of the LLC must enter into
an Operating Agreement that governs how the LLC will be operated.
Pass-Through Tax Treatment
LLCs are treated as “pass-through” entities under the Internal Revenue Code
unless the members elect to have it taxed like a Corporation. This means that the
owners report profits and losses only on their own personal income tax forms
and no separate entity-level filing is required. If a C Corporation earns a profit,
that profit is taxed. If those profits are then distributed to its shareholders, the
shareholders pay income taxes on those dividends. This is known as the “double
tax” and, while there are ways for small businesses to legitimately avoid the
double tax, LLCs that have pass-through tax treatment are not subject to it at all.
Flexible Allocation of Profits and Losses
Members of an LLC may generally agree to allocate profits and losses among
themselves by agreement; they are not required to allocate them in proportion
to ownership interest. This allows for more flexibility in separating ownership
interest from distribution of profits from ongoing operations, which may be
useful, for example, in businesses where some owners are actively involved in
day-to-day activities while others are not. It also provides significant flexibility in
tax planning for its members.
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Member-Managed and
Manager-Managed LLCs
An LLC offers significant flexibility in how its day-to-day operations are managed.
LLCs may be managed by its members (a Member-Managed LLC) or by managers
(Manager-Managed LLCs). In single-member LLCs, the member usually manages
the operations directly. If there is more than one member, the members may
divide the management responsibility among themselves or they may elect one
or more managers. A manager need not be a member of the LLC to serve in that
capacity. For businesses where the members are actively involved in running the
business, the members generally serve as the managers of the LLC.
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Tax Treatment
LLCs are generally treated as pass-through entities for income tax purposes as
described above. LLCs with a single member are treated just like a sole
proprietorship – the owner reports profits or losses on Schedule C of his or her
personal tax return. No entity-level tax return is required to be filed.
For multiple member LLCs, the default tax treatment is that of a partnership.
Although the LLC is not subject to income taxes, an income tax statement is
prepared and filed on behalf of the LLC allocating profits and losses among the
members. The members, in turn, include such amounts on their personal income
tax returns.
There may be instances where it is tax advantageous for the LLC to be taxed as a
Corporation and the LLC owner may choose such tax treatment by making a
filing with the Internal Revenue Service (IRS). An owner of an LLC with pass-
through taxation pays personal income tax on all of the profits of the LLC even if
some of the profits are left invested in the business.
With corporate taxation, income tax is only paid at the personal level if there is a
distribution of profits to the shareholders. Depending on the particular facts and
circumstances of the business, being taxed as a Corporation may be better or
worse than staying with the default of pass-through taxation. The advantage to
the LLC is that either tax treatment method can be chosen.
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LLC vs. C Corporation
An LLC is often chosen by small business owners
because of the flexible tax treatment discussed above.
An LLC generally does not pay tax at the entity level
and thus an LLC owner only pays tax on the profits of
the LLC on his or her individual income tax return. For
those LLC owners who wish to be taxed as a
Corporation, however, they may elect such tax
treatment by making a filing with the IRS.
Another advantage of an LLC over a Corporation is the
ability to allocate profits and losses among the
members as the members agree, while in Corporations
dividends are generally paid pro rata according to
share ownership. The IRS allows for special allocations
for LLCs and we recommend consulting your
accountant or tax advisor to learn more about this
option.
Finally, an LLC generally requires fewer corporate
formalities than a Corporation. LLCs may be managed
directly by members; there is no need to have a
separate board of directors or annual shareholder
meetings and periodic directors meetings with
minutes. For many, the convenience and simplicity of
forming a single-member LLC that is managed by the
member provides limited liability protection without
adding a lot of corporate bureaucracy.
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LLC vs. S Corporation
An S Corporation combines pass-through tax treatment
with limited liability protection like an LLC, but does have
several limitations that business owners should be aware
of when choosing between the two. A big difference is
that LLCs do not have the same restrictions on ownership
as S Corporations. S Corporations must be owned by
individuals (or trusts) that are U.S. citizens or residents,
and there must not be more than 100 shareholders. LLCs
may be owned by other LLCs or Corporations and the
owners do not have to be U.S. citizens or residents. There
may be an unlimited number of owners in an LLC.
An S Corporation does not allow for the flexible
distribution of profits and losses like an LLC. In an
S Corporation, dividends are paid to shareholders in
proportion to share ownership. LLCs may follow the IRS’s
special allocation rules to agree to allocations of profits
and losses that vary from ownership interests.
The advantage that LLCs have over Corporations in the
area of corporate formalities also apply to S Corporations.
In fact, in forming an S Corporation, small business
owners not only have to make the filings and comply with
the ongoing requirements for maintaining a corporation,
they also have to make an additional filing with the IRS to
elect S Corporation status and receive pass-through tax
treatment. For LLCs, pass-through tax treatment follows
automatically upon filing the Articles of Organization.
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Comparing Business Structures
The following chart provides a high-level comparison of the most popular
business forms across important attributes to consider when forming
your business:
Sole General
Partnership C-Corp C-Corp LLC
Proprietor
No Filing No Filing State Filing State Filing State Filing
Formation
Required Required Required Required Required
Limited
Personal No No Yes Yes Yes
Liability
Transferability Generally YES, Often
No No Yes
of Interest Limited Limited
Until
withdrawal or
Duration Unlimited Unlimited Unlimited Unlimited
death of
owner
YES, Unless
Pass-
election
Through Yes Yes No Yes
made
Taxation otherwise
Not as a Yes, but
Ability to
separate Yes Yes shareholder Yes
Raise Capital entity limits
Limits on
number of Yes No No Yes No
owners
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What about LPs, FLPs, PLLCs and LLPs?
LPs are limited partnerships
They provide limited liability protection for passive investors in the business (the
limited partners), but not for the general partner (who is responsible for managing
the day-to-day operations of the partnership).
FLPs are family-limited partnerships
They are similar to limited partnerships but are formed by family members and
can provide benefits in the form of tax planning and providing for an orderly
transfer of control from older family members to younger ones. If you have a family
business and are interested in this type of entity, consult your tax and legal
advisors to see if it is right for you. CorpNet can help you form an FLP if you choose
this structure.
PLLCs are Professional Limited Liability Companies
They are limited liability companies that are formed to provide professional
services. Most states require professional service providers (that is, for professions
that require a license to provide services such as doctors, lawyers, architects,
engineers, etc.) to form a PLLC rather than an LLC. California, however, does not
allow a PLLC to be formed at all. State laws vary in this area so the law in your
specific state should be carefully reviewed before proceeding. Once you know
what kind of entity you need, CorpNet can help you take the next steps to create it.
Most states allow for LLPs, which are Limited Liability Partnerships. LLPs combine
limited liability protection with partnership tax treatment. LLPs are a type of
general partnership that typically provides the general partner of the partnership
with limited liability from the obligations and liabilities of the partnership. The
limited liability partnership entity is a relatively new business form. If you decide to
form an LLP, you will need to file an application or registration in the jurisdiction
of your choice.
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Where to File?
Once you decide to form an LLC, you need to choose a state in which to make
your filing. Most people choose Delaware, Nevada, or their home state. Delaware
is often chosen, especially by larger companies, because it has the most
developed and flexible corporate statutes in the country and is considered pro-
business. Nevada has also become popular because of its lack of state corporate
income tax, franchise tax, and personal income tax. It also has relatively low fees.
Nevertheless, if you have a small business and are going to be conducting a
substantial amount of your business in your home state, it will likely be beneficial
to form your LLC in that state. If you form your LLC out-of-state, but do much of
your business in your home state, you will have to make a filing to “qualify to do
business” in the state if there is a substantial ongoing business or physical
presence in the state. You will then be subject to the same fees, taxes, and
regulations as if you had formed your LLC there in the first place, and you will
have paid filing fees (and, perhaps franchise taxes) to more than one state.
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Keeping an LLC in Compliance
Keeping your LLC in compliance with legal and tax requirements at the federal,
state and local levels is important to ensure that you receive the full benefits of
forming an LLC, including limited liability. Keeping your personal assets
protected is one of the most important benefits of an LLC and making sure you
comply with the various regulations applicable to your entity and business will
make it harder for creditors to “pierce the corporate veil” and hold you personally
liable for the debts and obligations of the business.
Of course, the first step is making sure your Articles of Organization are properly
filed and that you have created an Operating Agreement. LLCs, like all
businesses, are subject to a variety of taxes and regulations. Most states have an
annual franchise fee for the LLC and/or an annual report fee and filing
requirement. If the LLC has employees, it will need to apply for a separate tax
identification number from the IRS and make proper arrangements for payroll
taxes. Depending on the type of business, special permits or business licenses
may be required. CorpNet provides services in many of these areas. It is also
recommended that you seek advice from your legal, accounting and tax advisers
at the outset so you can make sure you haven’t missed anything.
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About CorpNet
Philip and Nellie Akalp are an attorney husband and wife team, based in
Southern California. They have founded several document filing companies in
the past and with their hand-chosen team now bring to you, CorpNet, their
signature company. CorpNet is based on the simple philosophy of truth in
business as well as the Akalp’s joint desire to assist small business owners and
entrepreneurs with getting their business off the ground in a fast, reliable, and
affordable manner.
CorpNet provides document filing services required in all 50 states for a variety of
business needs such as forming your own Corporation or Limited Liability
Company (LLC), filing a DBA/Fictitious Business Name, Foreign Qualification
Filings, Registered Agent Representations, Corporate Compliance Services, and
much more.
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Using CorpNet can save you both time and money with service that is fast,
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