LLC

Corporation

Limited Personal Liability

All LLC owners are protected from personal liability for business debts and claims. This means that if the business itself can't pay a creditor -- such as a supplier, a lender, or a landlord -- the creditor cannot legally come after any LLC member's house, car, or other personal possessions. Because only LLC assets are used to pay off business debts, LLC owners stand to lose only the money that they've invested in the LLC. This feature is often called "limited liability."

One of the main advantages of incorporating is that the owners' personal assets are protected from creditors of the corporation. For instance, if a court judgment is entered against your corporation saying that it owes a creditor $100,000, normally you can't be forced to use personal assets, such as your house, to pay the debt. Because only corporate assets need be used to pay business debts, you stand to lose only the money that you've invested in the corporation.

Exceptions to Limited Liability

While LLC owners enjoy limited personal liability for many of their business transactions, it is important to realize that this protection is not absolute. An LLC owner can be held personally liable if he or she:

	personally and directly injures someone
	personally guarantees a bank loan or a business debt on which the LLC defaults
	fails to deposit taxes withheld from employees' wages
	intentionally does something fraudulent, illegal, or clearly wrong-headed that causes harm to the company or to someone else, or
	treats the LLC as an extension of his or her personal affairs, rather than as a separate legal entity.

This last exception is the most important. In some circumstances, a court might say that the LLC doesn't really exist and find that its owners are really doing business as individuals, who are personally liable for their acts. To keep this from happening, make sure you and your co-owners:

	Act fairly and legally. Do not conceal or misrepresent material facts or the state of your finances to vendors, creditors, or other outsiders.
	Fund your LLC adequately. Invest enough  cash into the business so that your LLC can meet foreseeable expenses and liabilities.
	Keep LLC and personal business separate.  Get a federal employer identification number, open up a business-only checking account, and keep your personal finances out of your LLC accounting books.
	Create an operating agreement. Having a formal written operating agreement lends credibility to your LLC's separate existence.

An owner of a corporation can be held personally liable if he or she:

	personally and directly injures someone
	personally guarantees a bank loan or a business debt on which the corporation defaults
	fails to deposit taxes withheld from employees' wages
	does something intentionally fraudulent or illegal that causes harm to the company or to someone else, or
	treats the corporation as an extension of her personal affairs, rather than as a  separate legal entity.

This last exception is the most important. In some circumstances, courts can rule that a corporation doesn't really exist and that its owners are really doing business as individuals who are personally liable for their acts. This might happen if you fail to follow routine corporate formalities such as:

	adequately investing money in("capitalizing") the corporation formally issuing stock to the initial shareholders
	regularly holding meetings of directors and shareholders, or
	keeping business records and transactions separate from those of the owners.

Business Insurance

A good liability insurance policy can shield your personal assets when limited liability protection does not. For instance, if you are a massage therapist and you accidentally injure a client's back, your liability insurance policy should cover you. Insurance can also protect your personal assets in the event that your limited liability status is ignored by a court.

In addition to protecting your personal assets in such situations, insurance can protect your corporate assets from lawsuits and claims. Be aware, however, that commercial insurance usually does not protect personal or corporate assets from unpaid business debts, whether or not they're personally guaranteed.

Incorporating should never take the place of good business insurance. Even though forming a corporation normally protects your personal assets, you should use insurance to guard your corporate assets from lawsuits and claims.

A solid liability insurance policy can protect you against many of the risks of doing business. For instance, if you operate a clothing store, good business insurance should adequately cover the bill if someone slips and falls in your store.

Also, insurance can protect you where the limited liability feature will not. For example, if you personally injure someone while doing business for the corporation, say by causing a car accident, liability insurance will usually cover the accident so that you won't have to use either corporate or personal assets to pay the bill. Be aware that commercial insurance usually does not protect personal or corporate assets from unpaid business debts, whether or not they're personally guaranteed.

Taxes

An LLC is not considered separate from its owners for tax purposes. LLCs are not taxed on business profits; instead, the profits "pass through" the business to the owners.  This means that business income passes through the business to the LLC members, who report their share of profits -- or losses -- on their individual income tax returns. Each LLC member must make quarterly estimated tax payments to the IRS.

While an LLC itself doesn't pay taxes, co-owned LLCs must file Form 1065, an informational return, with the IRS each year. This form, the same one that a partnership files, sets out each LLC member's share of the LLC's profits (or losses), which the IRS reviews to make sure the LLC members are correctly reporting their income.

The corporation itself must pay corporate income taxes on profits -- that is, whatever is left over after paying salaries, bonuses, and other deductible expenses.

If an owner of a corporation works for the corporation, he is paid a salary, and possibly bonuses, like any other employee. He pays taxes on this income as do regular employees, reporting and paying the tax on his personal tax return.

The corporation pays taxes on whatever profits are left in the businesses after paying out all salaries, bonuses, overhead, and other expenses. To do this, the corporation files its own tax return, Form 1120, with the IRS and pays taxes at a special corporate tax rate.

Alternatively, corporate shareholders can elect "S corporation" status by filing Form 2553 with the IRS. This means that the corporation will be treated like a partnership (or LLC) for tax purposes, with business profits and losses "passing through" the corporation to be reported on the owners' individual tax returns.

Management

The owners of most small LLCs participate equally in the management of their business. This arrangement is called "member management."

The alternative management structure, "manager management" means that you designate one or more owners (or even an outsider) to take responsibility for managing the LLC. The non-managing owners are not involved in the business operations but still share in LLC profits. In a manager-managed LLC, only the named managers get to vote on management decisions and act as agents of the LLC.

The shareholders elect/appoint/remove the directors, file articles of incorporation and create bylaws.  The directors hold board meetings to set the corporation's fiscal or accounting year, appoint/remove corporate officers, adopt the corporate bylaws, authorize the issuance of shares of stock, and adopt an official stock certificate form and corporate seal.  The executive officers (president, CEO, secretary, etc.) run the day-to-day management of the business.

Formation

To create an LLC, you begin by filing "articles of organization" with the Secretary of State. You can form an LLC with just one person. While there's no maximum number of owners that an LLC can have, for practical reasons you'll probably want to keep the group small. An LLC that's actively owned and operated by more than about five people risks problems with maintaining good communication and reaching consensus among the owners.

In order to complete the articles of organization, you must specify a few basic details about your LLC, such as its name and address and contact information for a person involved with the LLC (usually called a "registered agent") who will receive legal papers on its behalf.

In addition to filing articles of organization, you must create a written LLC operating agreement. While you don't have to file your operating agreement with the state, it's a crucial document because it sets out the LLC members' rights and responsibilities, their percentage interests in the business and their share of the profits.

Finally, your LLC must fulfill the same local registration requirements as any new business, such as applying for a business license and registering a fictitious or assumed business name.

To form a corporation, you must file "articles of incorporation" with the Secretary of State.

In order to file the articles of incorporation, you must specify the name of your corporation, its address, and the contact information for one person involved with the corporation (often called a "registered agent").

In addition to filing articles of incorporation, you must create "corporate bylaws." While bylaws do not have to be filed with the state, they are important because they set out the basic rules that govern the ongoing formalities and decisions of corporate life, such as how and when to hold regular and special meetings of directors and shareholders and the number of votes that are necessary to approve corporate decisions. You must maintain a record of who owns the ownership interests (shares or stock) in the business.

Finally, your corporation must fulfill the same local registration requirements as any new business, such as applying for a business license and registering a fictitious or assumed business name.

Termination

Usually, when one member wants to leave the LLC, the company dissolves. In that case, the LLC members must fulfill any remaining business obligations, pay off all debts, divide any assets and profits among themselves, and then decide whether they want to start a new LLC to continue the business with the remaining members.  Your operating agreement may provide for alternative measures, such as "buy-sell," or buyout, provisions, which set up guidelines for what will happen when one member retires, dies, becomes disabled, or leaves the LLC to pursue other interests.

Usually, shareholder approval is required.

Formalities

LLC owners do not have to hold regular ownership and management meetings or follow many other corporate formalities, however, then you must

• make sure that managers or members  sign documents in the name of the LLC

• maintain separate bank accounts from their owners, and

• keep detailed financial records

Corporations and their owners must observe certain formalities to retain the corporation's status as a separate entity. Specifically, corporations must:

• hold annual shareholders' and directors'   meetings

• keep minutes of shareholders' and directors' major decisions

• make sure that corporate officers and directors sign documents in the name of the corporation

• maintain separate bank accounts from their owners

• keep detailed financial records, and

• file a separate corporate income tax return.