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The Basics Of An LLC

Without question, the most popular corporate entity that most Colorado businesses use is the limited liability company (LLC) – and with good reason. The LLC is relatively easy to set up, relatively easy to maintain and offers numerous advantages to business owners. It’s the most common entity upon which I rely, and it’s the one I generally advise my clients to use.

The most frequent questions I get about LLCs involve taxation. Although I’m not a tax lawyer and do not give tax advice, I do know that one of the major benefits of LLCs is that they get pass-through treatment. This means that the members of an LLC get taxed at their individual rates rather than at specialized corporate rates. Moreover, if it’s a single-member LLC – which many, and perhaps most, are – then the IRS considers it a “disregarded entity.” This means that the one member of the LLC is taxed as though the LLC did not exist at all. This makes filing taxes relatively simple.

The terminology of an LLC is different than that of corporations. An LLC is “formed” rather than “incorporated.” The owners are “members,” not “shareholders,” and each member has an “interest,” rather than “stock” or “shares.” There can be an unlimited amount of membership interests in an LLC, which is frequently the case in larger companies.

The flexibility that an LLC provides in terms of operations is highly desirable. In their operating agreement, the members of an LLC can decide on their economic relationship, how profits and losses will be distributed, and other matters. When changes arise, it’s relatively easy for the members to change the terms of how they operate. It’s not necessary to specifically state the business purpose of the LLC; a phrase indicating that the LLC will “conduct any business permitted by law” is sufficient.

Although there are no strict requirements as to how many members an LLC may have and what their roles are, the LLC definitely should name a TMP – tax matters partner. This will be the person the IRS contacts. Obviously, this is tremendously important.

Another major advantage of the LLC is that, if you get to a point where your company has outgrown LLC status and wants to become a corporation, it’s a very simple transition – and it’s not even a taxable event.

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