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Limited Liability Companies

As your small business begins to grow, as will your entrepreneurial enthusiasm, and though manifesting your ideas into an empire is extremely exciting– it can also be risky. As your business begins to grow– garnishing more traffic, revenue streams, and overall success, it also becomes more vulnerable. And, understanding the multiplicity of legalities a small business owner must take to protect their business from these threats is very important. The Southeast Colorado SBDC understands it can be a daunting task from small business owners to fully realize all the different legal  structures involved, so don’t worry… we are here to help!

What is an LLC?

According to RocketLawyer.com:

“A Limited Liability Company (LCC) is a type of legal business entity that was developed to provided business owners with a lower level of liability. According to the IRS, LLC owners face significantly lower caps on company actions and debts. In general this means that if the LCC has unpaid debts, creditors can only go after the assets of the company, and not the personal asses of the company owners.”

Every state slightly differs from one another when defining what constitutes an LCC, but in general, all LCCs are created by individuals or corporations who are legally capable of forming a business structure. Understanding the basics can help you decide whether or not you want to form an LCC for your business.

LCCs come in many different forms including partnerships and corporations. If multiple people are involved in the creation of the LCC, then it is considered a Partnership LCC when it comes to federal tax purposes. If a single person forms an LCC, then the LCC is considered a separate entity from themselves.

Depending on the type of LCC you choice to file for your small business, your business will then file taxes as either a corporation, sole proprietorship, or partnership.

The Four Types of LLCs:

Sole Proprietorship

A sole proprietorship is registered when one single person owns and operates a business. S/he is personally liable for business transactions, debts and taxes the business creates or owes.

Sole proprietorships are designed for single-owned businesses (one owner).

This is the most common type of LCC filing, as well as the least expensive to file, with the simplest paperwork and filing processes.

General Partnership

General partnerships are registered when multiple co-owners are forming an LCC. In a general partnership each of the co-owners are now responsible for the debts, business transactions, and taxes the business creates.

A general partnership guarantees each co-owner equal say-so in the sales of assets, as well as equal liability of tax expenses.

Limited Partnership

A limited partnership is very similar to a general partnership, but in a limited partnership, only one co-owner must maintain full liability for the business structure and at least one other co-owner is limited in their liabilities.

Limited partnerships are typically filed when a new investor joins forces with an, already registered, sole proprietor.

Family-Limited Partnership

A family limited partnership is identical to a limited partnership, except the co-owners are related. This type of LCC filing is only necessary when the business owners plan to change control of their assets in the future, or prevent the change of control.

Family limited partnerships can be vital for businesses whom wish to keep ownership within the confines of the family.

LLC Facts and Questions:

1. How do LCCs compare to other business entities?

LCCs offer the same protections a S and C corporations, but they are not always the best choice. If you find yourself asking, “What does an LCC mean for my investing purposes?” You may be disappointed to find that an LCC could limit some of your options. Investors may be more hesitant about backing an LCC because they might feel that it’s a less stable type of business entity. You may still be able to attract investors without a problem, but you may have to work harder to demonstrate how your company is as secure as a corporation. If you have questions about whether an LCC is right for you, it’s smart to find a lawyer. –Rocketlawyer.com

2. What should I consider when forming an LCC?

It is always recommended that partnership agreements be made in writing similar to that of a pre-nuptial agreements before signing on the dotted line. Without a partnership agreement, the business structure is subject to whatever default state laws are in place if one of the partners dies, or if the company is dissolved for any number of reasons. Always consult proper tax and legal counsel while forming and running a business. Smallbusiness.chron.com 

3. Why should I set up a business entity, anyway?

Better Protection:

Entities are typically protected against personal liability for business debts and other liabilities. This means creditors can’t collect your personal assets or the personal assets of your managers to pay business debts and judgments.

Potential Tax Benefits:

There are often significant tax savings that can be realized by setting up a separate entity. To begin with, it’s simply easier to separate your deductible business expenses from your non-deductible personal expenses.

Deal Certainty:

With a separate entity and a good Operating Agreement (LLC) or Bylaws (Corporation), the owners and managers of your business all know what their deal is! No more wondering who’s in charge, who owns what percentage of the business, etc.

Legitimacy:

People tend to see a separate entity such as an LLC or corporation as a more legitimate business than a sole proprietorship. It shows that you take your business seriously and have taken the right steps to protect yourself and your company. -Betterlegal.com

4. Do I need to get a tax number for my LCC?

Yes, almost every business needs a tax ID, called an Employer ID (EiN). It’s like a Social Security Number for a business. You definitely need an EIN if:

  • You have employees,
  • You operate your LLC as a partnership (the default tax status for LLCs with more than one member),
  • You file any of these tax returns: Employment, Excise, or Alcohol, Tobacco and Firearms.

You may also need an EIN if you want to open a business bank account or get a business loan. You can apply online for an EIN and get the number immediately.

*Be careful when searching online for the EIN application. There are fake EIN application sites that look like the official IRS website and will lead you through the process then charge you. The IRS NEVER charges for EIN applications. Use the IRS “EIN Assistant.” -Thebalancesmb.com

5. Do I need an attorney to start an LLC?

All LCC filings need two documents: 1.) Articles of Organization to register your LCC with your state (some state require a Certificate of Organization instead. And, 2.) an Operating Agreements describing the operations of the business.

State legislation states, “Anyone forming an LCC should consider utilizing a lawyer. However, there is no requirement to use a lawyer when forming an LCC.”

The Operating Agreement is the primary document that establishes the rights, powers, duties, liabilities, and obligations of the members between themselves and with respect to the LCC. The Operating Agreement is an internal document of the LCC and is not filed with the Department of State.

Even if you decide to file the Articles of Organization yourself, you should consult with an attorney about helping you write the Operating Agreement– because it is a contract. -Thebalancesmb.com

6. What is the cost of an LCC?

Your business will need to pay a fee for filing your Articles of Organization/ Certificate of Organization. This fee varies by state, but it is usually between $50 and $200. If you have an attorney do this filing, you will pay attorney fees for this service. If the attorney prepares the Operating Agreement, that will be another cost. -thebalancesmb.com

7. I noticed that a “registered agent” is required to form the LCC. Can I serve as my own registered agent?

A registered agent is a person or business who represents the business for legal correspondence. Registered agents are regulated under state laws. Most states require that you use a mailing address, not a PO Box, for the registered agent. If you are registering your LLC in another state, you must find someone with an address in that state to serve as the registered agent. While you can serve as your own registered agent, it’s better to have a specific registered agent service.
thebalancesmb.com

8. Where can I get more information about the LCC laws in Colorado?

To register as a Limited Liability Company, you’ll need to file Articles of Organization with the Colorado Secretary of State. If it sounds like a lot of work, don’t worry– the entire application can be complete online.

Here’s what the webpage looks like:

For more information and FREE legal documents, forms, and contracts go to LawDepot.com

Do you have more questions about registering your business as an LCC?

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