The LLC is a new hybrid form of doing business that combines characteristics of the corporate structure and the partnership structure. It is a separate entity like a corporation and therefore carries liability protection for all of its' members, but (if structured properly) is taxed like a partnership which has the benefit of flow through taxation.

The owners are called members and can be virtually any entity including individuals (residents or foreigners), corporations, other LLCs, trusts, pension plans etc. Many states permit one member LLCs, only two do not. Currently it is considered a questionable practice to form a one member LLC because of the IRS problems that this might create. A husband and wife are considered two members for formation purposes.

An LLC is formed by filing a form, usually called Articles of Organization, with the Secretary of State. The corporation division of most secretary of state offices handles LLCs. Most states require an annual report be filed to keep them apprised of current status, but other than that, there are no other on going reports or forms. The LLC is not a tax paying entity. Profits, losses etc. flow directly through and are reported on the individual members tax returns. The LLC files a partnership return under Subchapter K of the Internal Revenue Code.

Most states require that the LLC have an Operating Agreement of some kind and a written, carefully drafted one is the prudent practice. The operating agreement is the agreement between the members as to how the LLC will be managed and contains provisions that will qualify it for the beneficial and coveted partnership tax treatment. The other side of the coin obviously is that, if not drafted correctly, the LLC will not qualify and will be taxed as a corporation. The state statutes are basically classified as bulletproof or flexible. Bulletproof statutes require that the operating agreement have certain provisions that guarantee that the LLC will qualify for partnership taxation. Flexible statutes leave the drafting of operating agreement provisions up to the individual organizers.

The key issue to determine whether the LLC qualifies for partnership tax treatment is whether or not it is too much like a corporation. Fortunately, there is a test and it boils down to four basic characteristics that corporations have. The LLC can only have two and still retain its partnership tax status. They are limited liability, continuity of life, centralized management and, free transferability of interests. Selecting the two that your LLC will have and making sure you don't have three is the tricky part and where the importance of proper drafting of the operating agreement comes in. The IRS has approved a simplified process called "Check the Box", wherein the LLC organizer can just elect what tax treatment is preferred. Not all states have adopted "Check the Box" and currently the safest way to organize is to comply with the original guidelines with respect to corporate characteristics.

In Which State Should I Incorporate or Form an LLC?

One of the unique features of incorporating or forming an LLC (as opposed to filing a DBA) is that you do not necessarily have to form the company in the State where you do business. When deciding on which State to incorporate in, there are basically 2 choices:

1. Your Home State
2. Delaware, Nevada or Wyoming

Your Home State

For the majority of small businesses, incorporating or forming an LLC in your home state is usually the easiest and least expensive option. This is because virtually every state has laws that require you to "re-register" a Delaware or Nevada company in the state where it is actually doing business.

For example, if you form a Nevada corporation but your physical business is located in Colorado, the state of Colorado will want you to "re-register" as what's called a "foreign corporation" (a company that was not originally incorporated in Colorado). This is especially true if you intend to get a bank account and business license or rent office space in your home state.

In most cases, registering as a "foreign corporation" or LLC will subject you to all the same taxes and fees as an in-state company. So you will probably have not avoided any taxes or fees, plus there is the added expense of registering as a "foreign corporation" in your home state and any annual fees in both states.

This is not to say there are not valid reasons for choosing another State, we just like our potential clients to be aware of the additional steps required when choosing a State outside of their home State. Further discussion with your attorney or other advisor is recommended.

Delaware, Nevada or Wyoming

Delaware

Delaware is where most large corporations are incorporated. The reason for this is that Delaware's body of law is more business-oriented and they have a large and advanced business court system to handle complex legal litigation. It is the State of choice for both large corporations, foreign corporations and many fast-growing or high-potential companies.

Nevada

Nevada has recently exploded in popularity for both large and small businesses. This is due to Nevada's very pro-business climate, low-tax mentality and the lack of an information sharing agreement with the IRS (all other States share company information with the IRS). Also, shareholders in Nevada corporations are not public knowledge (though Officers/Directors and Members of LLC's are).

Wyoming

Wyoming also has a very business-friendly climate and features some benefits compared to a Nevada entity including lower filing fees, bearer shares, and more.

Common Reasons for Choosing Delaware, Wyoming or Nevada

Prestige: a Nevada or Delaware entity is the chosen business entity of the largest, most successful and fastest growing companies in the world.

Protection: predatory consumers or lawyers who attempt to threaten companies may be more hesitant to deal with a Nevada, Wyoming or Delaware company knowing that the body of law protecting the company may be more business friendly and protect the owners/shareholders more effectively. Also the identity of the company owners may be more difficult to ascertain.

Convenience: in some cases, a business may find itself moving from State to State or having partners all over the country.  In this case, some businesses find it easier to simply use a Nevada, Wyoming or Delaware entity as a sort of "headquarters" that maintains the company while it moves or expands to other States.  This can be easier than continuously creating and dissolving in-state companies (and changing Tax ID Numbers, Registered Agent addresses, losing company credit profiles, etc.)

High Growth or High Risk Company: if your company is fast-growing or engaged in a risky industry (such as fireworks or children's toys), then Nevada, Wyoming or Delaware may provide the liability protection you need. Also, if your company is fast-growing, choosing Nevada or Delaware now may prevent you from needing to inevitably re-incorporate there in the future when your company needs to go public or receive venture funding, etc.

Holding Property or Independent Contractor: A client who simply needs an entity and a bank account to purchase or hold property, accept payments as a contractor or receive investment money will form a Delaware, Nevada or Wyoming company for this purpose since they are really not "operating a business" in their home State. In fact, many simply form the company and leave it until they are ready to engage in business.

All of the required forms are included in the packages below for the appropriate states for a Limited Liability Company ( LLC ) entity, enabled for desktop preparation.