ELIGIBILTY HOW TO FORM A LLC WHY FORM A LLC DISADVANTAGES TAX REPORTING & FORMS

An LLC can be treated as either a partnership of an association taxable as a corporation for federal tax purposes depending on whether or not the LLC possesses more than two of the four corporate characteristics.

• Continuity of Life - Which is an organization that will not have dissolution in case of death, insanity, bankruptcy, retirement, resignation, or expulsion of any member.
• Centralization of Management - An organization has centralized management if any person has continuing exclusive authority to make the management decisions necessary to the conduct of the business for which the organization was formed.
• Limited Liability - An organization can be classified limited liability is under local law, there is no member who is personably liable for the organization's debts.
• Free Transferability of Interests - An organization will be classified if each of its members, or those members owning substantially all of the interests in the organization, have the power to substitute for themselves in the organization a person who is not otherwise a member, without the consent of the other members.

If the LLC has more than two of the above corporate characteristics, it will be treated as an association taxable as a corporation

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• Articles of Organization must be filed with the secretary of state's office (these articles contain information about the name, address, purpose, who organized it, who the registered agent is, and so on)
• Depending on location, an Operating Agreement must also be filed with the Articles of Organization (the operating agreement purpose is to guide the conduct of the business)

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1. Limited Liability - Members of an LLC are protected from being personally liable for acts of the LLC and its members.
2. Flexible membership - Members can be individuals, partnerships, trusts, or corporations.
3. Management - As a member, you can manage the LLC yourself, or elect a management group.
4. Flow-through Treatment - Income, losses, deductions, and tax credits flow through the LLC to the individual members.
5. Disproportionate Distributions - A member of an LLC may have a 50% interest in LLC assets, but can be entitled to 60% of the income if the operating agreement states so.

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1. One Member LLCs - Most states do not allow LLCs to have only one member.
2. Free transferability of interest - This is usually restricted to enable the LLC to be treated as a partnership.
3. LLC not recognized - Not all states have LLC statutes.
4. Nontraditional Entity - Little precedent available in case of lawsuits.
5. Cost - The expenses to form usually cost more to form and to maintain than a sole proprietorship or a general partnership.

BACK TO LIMITED LIABILITY COMPANIES

• SS-4
• FORM 1065
• For further information regarding tax reporting and forms, please review LIMITED PARTNERSHIPS.

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