This is the final article in our series on setting up a U.S. business. This article will discuss the hybrid business model of limited liability companies (LLC). Limited liability companies are fairly common for startups (although not as common as corporations) and are available for foreigners coming into the United States to start a business. This article will discuss the advantages and disadvantages of forming an LLC, the LLC Operating Agreement, and the formation process.
Below are the links to the other articles in this series.
Setting Up A U.S. Business For International Startups Part 1: The Sole Proprietorship
Setting Up A U.S. Business For International Startups Part 2: The Partnership
Setting Up A U.S. Business For International Startups Part 3: The Corporation
Registering your business is one of the first steps in setting up a U.S. business. Although it is not required, there are many reasons why a foreigner (or foreign company) coming into the U.S. to do business would want to register a business here. Setting up a U.S. LLC is not different for foreigners than for U.S. citizens and residents. Keep in mind, if you are coming into the U.S. you do need to comply with U.S. immigration requirements, such as visa and work permit requirements. An immigration expert can help you determine the best way for you to come to the United States legally.
What is a limited liability company?
A limited liability Company is a hybrid (between a corporation and a partnership) type of legal structure that provides the limited liability benefits of a corporation and the tax efficiencies and operational flexibility of a partnership. Owners of an LLC are referred to as “members” and, depending on the state, there can be one member, two or more individuals, corporations, or other LLCs. For federal tax purposes, an LLC is not a separate entity, so the business itself is not taxed. All federal income taxes are passed on to the LLC’s member to be paid through their personal income tax. Although the federal government does not tax income on an LLC, some state do, so you should check with your state’s income tax agency.
A limited liability company can elect to be treated like an S corporation for tax purposes. This election must be made two months and 15 days before the beginning of the tax year in which the election is to take place.
What are the advantages and disadvantages of forming a limited liability company?
There are many important, almost conflicting, advantages and disadvantages to forming a limited liability company. For example, LLCs have tax advantages that are attractive to many members, but this type of business structure is not as attractive (as a corporation) to investors. Because of this, you should carefully consider each to determine the best option for your company. We recommend that you speak with an attorney who can give you advice on the best business structure for your company and a tax expert who can advise you on your tax obligations under different structures.
Keep in mind, you can change your business structure in the future, which in the case of a conversion from an LLC to a corporation isn’t too complicated or expensive.
Advantages:
- Limited liability for members: Members are protected from personal liability like shareholders of a corporation.
- Less record keeping and startup cost than a corporation
- Fewer restrictions on profit sharing: Members can choose how profits and losses are allocated amongst each other.
Disadvantages:
- More limited business life: In many states, when a member leaves the business, the business must be dissolved. However, a provision can be included in your operating agreement to keep the business going in the event a member leaves.
- Self-employment taxes: Members must pay self-employment taxes and contributions to Medicare and social security.
- It’s harder to raise money: because there is no stock to be sold or given, some types investors (particularly VCs) will often not invest in LLCs.
What should be included in your operating agreement?
Although not all states require an Operating Agreement, it is highly recommended for all LLCs, particularly multi-member LLCs. An Operating Agreement will protect you, the other LLC members, and the business. An Operating Agreement should structure your LLC’s finances and organization and provide the rules that will ensure the smooth operation of the business. Below are the some of the most common provisions included in Operating Agreements:
- The breakdown of ownership, as a percentage for each member;
- The way in which profits, losses, and expenses will be allocated among members;
- Who can bind the partnership (to contracts, purchases, etc.);
- A description of the agreed upon decision making process (who, how, and when decision are made);
- A description of the dispute resolution process to be used; and
- A description of dissolution (liquidation) process (in the event a member leaves or dies or new members want to join).
How do you form a limited liability company?
State law governs businesses in the United States, including the establishment and management of LLCs. This means, the requirements will vary by state. You can form your LLC on your own, or you can hire an attorney to help you through the process. In general, states require the following:
1. Choose a business name: There are three rules to follow when choosing a business name for your LLC: 1) it cannot already be taken by another LLC in your state; 2) it must indicate that the company is an LLC; and 3) it must not include words that are restricted by your state. Your business name will be automatically registered with the state when you register your business.
2. File Articles of Organization: The Articles of Organization is a simple document that legitimizes your LLC. This document includes your business name and address and the names of the LLC’s members. In most states, you will file the Articles of Organization with the Secretary of State, but you should check the requirements of the state in which you are located. There may be a fee associated with filing this document.
3. Create an Operating Agreement: Most states do not require an operating agreement, however, it is really important to protect yourself, the other members, and your LLC.
4. Obtain licenses and permits: Once you have registered your business, you are required to obtain all necessary business licenses and permits. License and permit regulations vary by industry, state, and locality.
5. Announce your business: Some states, including New York, require that you publish a statement in the local newspaper about your LLC formation. To learn more about this requirement, check with your state’s business filing office
Although the LLC is a fairly common business structure in the United States, the advantages and disadvantages should be weighed carefully to determine whether it is the best structure for your company. For fast-growing startups intending to seek investment, the difficulties in getting investors may outweigh the ease and money saved by forming an LLC.
Related Articles and Content You Might Like:
How To Save On Startup Legal Costs In The US
Setting Up A U.S. Business For International Startups Part 1: The Sole Proprietorship
Setting Up A U.S. Business For International Startups Part 2: The Partnership
Setting Up A U.S. Business For International Startups Part 3: The Corporation
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