For those clients who are new to limited liability companies (LLCs) and have questions, we have provided answers to the following questions below:
- What is an LLC?
- Why should I form an LLC?
- How long does it take to form an LLC?
- How does an LLC work?
- How much does forming an LLC cost?
1. What is an LLC?
LLC stands for “limited liability company.” A limited liability company is a business entity that is entirely separate from its owner.
For example, take John Doe. John Doe mows lawns for a living. If John Doe mows lawns as “John Doe,” collects money as “John Doe,” and acquires new equipment or property as “John Doe,” there is no separation at all between him personally and his business. He and his business are one and the same. This type of arrangement is common and is called a “proprietorship.” This means that if John Doe’s business ever owes money or his business gets sued, he will owe the money personally or he will get sued personally, because he and his business are one and the same.
An LLC is a separate business entity. If John Doe forms an LLC, his LLC will be a separate legal entity (similar to forming a separate legal person). Although John Doe would control the LLC, the LLC would be a separate thing that could sue, be sued, own property, have a bank account, etc.
2. Why should I form an LLC?
There are many reasons to form an LLC. The following are the three most common reasons that I hear from business owners wishing to form an LLC:
- To take advantage of the LLC being a “separate” entity (separate and apart from its owner)
- To take advantage of tax savings
- To own real estate
A Separate Entity
Because the LLC is a separate entity, it can own property and enter into contracts, separate and apart from its owner. In our example above, say that John Doe wants to run a commercial on TV to advertise his business. Without an LLC, he has no choice but to sign the contract as “John Doe.” Now he is a personal party to the contract, and he will likely be on the hook if something goes wrong. For example, if something happens and he can’t afford to pay for the advertisement, any lawsuit will be against him, personally. And if the plaintiff wins, they can go after John’s assets to satisfy and pay that judgment.
Now, let’s say that John’s business is an LLC, and he wants to run that same TV ad. In this case, he could sign the contract as “John Doe, Manager of XYZ, LLC.” Now, the LLC would be the party to the contract and be bound by its terms. So if the LLC could not pay for the ad, the TV station would sue the LLC, rather than John Doe personally (so long as John had not personally guaranteed the contract). And if the TV station won, it could not go after John’s assets; its financial recovery would be limited to the assets owned by the LLC, not the assets owned by John.
There are many tax-saving opportunities for business owners that form an LLC. First of all, you should discuss these matters with your CPA or accountant – don’t just take our word for it. LLCs in Missouri may elect to be taxed as an “S corporation” or as a traditional corporation. These opportunities may or may not make sense for your business. Many of our clients have formed an LLC that is taxed as an “S-corporation” to save on self-employment taxes. This is a common scenario for business owners.
If John Doe, working as a proprietor, makes $100,000 of profit, he is going to have to pay approximately 15% of those profits to the government in the form of self-employment taxes. Anyone who has ever worked for an hourly wage and received the first check should understand this. The check is never as much as you would like, because taxes are withheld by your employer (for Medicare, Social Security, FICA). In that scenario, about half of the employment taxes get paid out of your check, and your employer matches it and pays the other half. In John Doe’s case, because he is self-employed, he will still be required to pay all of those same items; however, because he is his own employer, he gets to pay both halves, meaning he will have to pay about 15% of his profits as self-employment tax.
Thus, a common scenario for many business owners is to set up an LLC that elects tax-wise to be treated as an S-Corporation. By doing this, John Doe can make himself an official employee of his own LLC. In this case, rather than paying 15% self-employment tax on the entire $100,000 that he profits, John would instead set himself up at a reasonable salary as an employee. Then, he would only pay 15% on the portion that is his salary – he would not have to pay the 15% on the remainder of his profits, which would then be considered “draws” or “dividends” and would not be subject to self-employment tax. This one move could reduce John’s tax burden by several thousand dollars each year.
Owning Real Estate
This is simply another variation of the first reason: “taking advantage of the separate nature of the LLC.” Much like an LLC can enter into contracts as a separate entity, an LLC can also own real estate on its own. It is usually preferable to have an LLC own real estate, rather than owning it personally, in your own name. You would own the LLC, which would own the real estate. That one extra level of security could make a big difference.
From an asset protection standpoint, if someone is thinking of suing you and is researching the public record, property that is held in an LLC may not come up in any such search, because you don’t own it – the LLC owns it. Also, if someone is injured on the property and wants to sue the property owner, they would then be looking to sue the LLC, rather than you personally. In addition, if anyone were to win such a lawsuit and get a judgment, it would be against the LLC – not against you personally. So your home, vehicle, bank accounts, and other assets would not be tied up in the lawsuit. Instead, a judgment against the LLC would likely only result in the loss of the assets contained in the LLC – in this case, the real estate owned by the LLC.
3. How long does it take to form an LLC?
The formation of an LLC can take as little as one day, or it could take several weeks or longer. It depends on how many owners there are and how you desire to structure the company. Most LLCs can be formed fairly quickly.
4. How does an LLC work?
An LLC generally has two separate parts: ownership and management. The owners are referred to as “members,” while the people in charge of the day-to-day operations of the business are known as “managers.” A “member-managed LLC,” which describes most of the LLCs we form, is an LLC that is managed by the person who owns it.
An LLC should have its own bank account. Company-operating funds should be held separately in this account, apart and separate from the owner’s personal funds. An LLC will usually get its own employer identification number or tax ID number, although a single-member (one owner) LLC does not have to; it can use the Social Security Number of the owner in lieu of a tax ID number.
An LLC is formed by filing the proper formation documents with the Secretary of State. It is extremely important that an LLC have an “Operating Agreement,” which documents the rights, responsibilities, and agreements between the company and its owners and managers. Many people who form their own LLC do not know what an Operating Agreement is, how to form one, or even that one is required. However, an LLC without a proper Operating Agreement is not a properly formed LLC and may not hold up in court if the LLC ever gets sued. It is very important that all of these formalities are observed when forming an LLC, so we urge you to consult an attorney.
5. How much does it cost to form an LLC?
Of course, the cost of an LLC depends on many factors, including the number of owners, how you want the company to be structured, who the registered agent will be, the terms of the Operating Agreement, and so forth. Typically, by the end of a short phone conversation or after an office visit, we will be able to quote you a fee. We generally quote flat fees, which means that in most cases, we do not quote by the hour. Instead, we quote a one-time, flat fee to handle your LLC formation from start to finish.
Generally, more owners means a higher cost; less owners (such as one owner) will be cheaper. More complicated arrangements will cost more; simpler cases will cost less. We charge a little less if a client doesn’t have any questions and is ready to form the LLC; we charge a little more if you need plenty of guidance and answers. Please contact our offices to obtain an official quote.
Contact Us Today
If you have any questions about forming an LLC, please call or email anytime to speak with one of our attorneys. You can also contact us using the form on the right-hand side of this page.