Form an LLC

The steps to form an LLC are similar to those for a corporation: an LLC is formed by filing Articles of Organization; this document is similar to the coproration's main charter document -- the Articles of Incorporation. Also, and rights and duties of parties involved with the LLC are outlined in the LLC Operating Agreement, very similar to a corporation's corporate bylaws.

The main difference between a ‘regular’ corporation and an LLC IS HOW profits are passed to the owners.

Real estate that appreciates in value or company assets that are sold generate income for both types of entites, but the LLC form isn't double taxed – profits flow through to the owners and are taxed as regular income. In a corporation, profits may be taxed first as corporate income and then later as income to shareholders when a dividend distribution occurs.

Consider a corporation (instead of an LLC) if raising funds through stock sales is part of the business plan or if incentives will be part of a hiring strategy. Corporations offer more options for fringe benefits to entice employees and ownership can be more easily transferred through stock sales. If the business is to be ‘tightly held’ an LLC is a better option.

The LLC Operating Agreement

States offer default rules to form an LLC, and not all require an official operating agreement. However, it is wise to create one whatever the requirements.

The main purpose of an operating agreement comes into play if there is ever a lawsuit against the company. The status as an LLC may be challenged if no clear operating agreement is in force. Protection is best when a judge recognizes the company as an LLC and an operating agreement is a key element.

The operating agreement includes information about financial management and distributive shares. Distributive shares show the ownership in the LLC per individual as a percentage basis. This is usually related to how much capital each person invested, but a special skill might bestow ownership rights beyond a financial contribution – these are called special allocations. The operating agreement clarifies these relationships.

Articles of Organization

This is the company charter that lists information about the company and is recorded at the State level. At a minimum, it will include the legal name and a registered agent in the state of filing. It many cases, the articles will also describe the intended nature of the business.

Requirements vary by State and many Secretary of State Offices offer form samples. While the articles of organization are filed with the subject, State Fees vary by State but are similar to those needed to file incorporation documents.

Buyout Agreement

Although not required, a buyout agreement is essential when forming an LLC. Also called a buy-sell agreement, the purpose is to decide ahead of time how common business events will be handled. These include:

• How separation affects the business and whether a buyout can be forced by a departing member – this can happen through death, retirement, sickness, divorce proceedings or other reasons.
  
  
• Who is eligible to purchase the departing member’s share of the business?
  
  
• How is the price determined?
  
  
• What other events (criminal activity, malfeasance, other) can trigger a buyout?

The agreement will usually address related issues like personal bankruptcy of a member and how a legal interest in the LLC may (or may not) be transferred to another party. The buyout agreement is an important document that can prevent serious legal action later.