Nolo's Quick LLC: All You Need to Know About Limited Liability Companies

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Written by America's leading LLC expert!

If you run your own business, you’ve probably heard about limited liability companies. ...
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Overview

Written by America's leading LLC expert!

If you run your own business, you’ve probably heard about limited liability companies. Business owners who operate LLCs aren’t personally liable for business debts. But is an LLC right for you?

Nolo's Quick LLC provides essential information for business owners in every state. It explains, in plain English, the advantages and drawbacks of forming an LLC – including limiting your personal liability.

Nolo's Quick LLC covers:
  • who should – and shouldn’t – form an LLC
  • how to operate an LLC easily
  • choosing between a member-run or a manager-run LLC
  • LLCs compared to corporations, partnerships and sole proprietorships
  • how to keep your tax status simple at the start
  • how to elect corporate tax treatment when (and if) you’re ready
  • the ongoing legal and tax paperwork that’s required

    Practical, concise and easy to read, the 4th edition of Nolo's Quick LLC provides the latest facts, figures and tax information you need to know about this valuable business option.
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Editorial Reviews

Reference & Research Book News
"Mancuso provides advice on how and why to form an LLC and gives guidance on dealing with members capital and profits interest, taxation or profits management, paperwork, and soliciting legal and tax help."
USA Today
When it comes to self-help legal stuff, nobody does a better job than Nolo.
The Washington Post
Nolo publications . . . guide people simply through the how, when, where and why of the law.
The Washington Post
Kiplinger's Personal Finance Magazine
Nolo has been publishing excellent self-help legal manuals since 1971
From the Publisher
"Mancuso provides advice on how and why to form an LLC and gives guidance on dealing with members capital and profits interest, taxation or profits management, paperwork, and soliciting legal and tax help."  Reference & Research Book News
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Product Details

  • ISBN-13: 9781413309294
  • Publisher: NOLO
  • Publication date: 3/16/2009
  • Edition number: 5
  • Pages: 224
  • Product dimensions: 7.02 (w) x 8.96 (h) x 0.45 (d)

Meet the Author

Anthony Mancuso is a corporations and limited liability company expert. He graduated from Hastings College of Law in San Francisco, is a member of the California State Bar, writes books and software in the fields of corporate and LLC law, and studies advanced business taxation at Golden Gate University in San Francisco. He has also been a consultant for Silicon Valley EDA (Electronic Design Automation) companies, most recently working on a C++ open-source integrated circuit database project team. He is the author of several Nolo books on forming and operating corporations (both profit and nonprofit) and limited liability companies. His titles include Incorporate Your Business, How to Form a Nonprofit Corporation (national and California editions), Form Your Own Limited Liability Company, The Corporate Records Handbook, and LLC or Corporation?. He wrote and programmed Nolo's LLC Maker and Incorporator Pro software programs, which generate state-by-state articles and other forms for organizing corporations and LLCs. His books and software have shown over a quarter of a million businesses and organizations how to form a corporation or LLC. He also is a licensed helicopter pilot and has performed for years as a guitarist in many musical idioms
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Table of Contents

I. Introduction

Should You Consider Forming an LLC?
How to Use This Book
What This Book Doesn't Do
Legal and Tax Experts
Other Nolo LLC Resources

1. An Overview of LLCs
Basic LLC Features
Exceptions to Owners' Limited Liability
Basics of Forming an LLC

2. The LLC vs. Other Business Structures
Other Business Structures
What Is a Sole Proprietorship?
What Is a General Partnership?
What Is a Limited Partnership?
What Is a C Corporation?
What Is an S Corporation?
What Is an RLLP?
Deciding Between an LLC and Another Business Type
Business Structures Comparison Table

3. Members Capital and Profits Interests
LLC Capital Interests
Tax Considerations of Start-Up Capital
Converting an Existing Business to an LLC
Profit and Loss Interests
Special Allocations of Profits and Losses

4. Taxation of LLC Profits
Pass-Through Tax Treatment
How LLCs Report and Pay Federal Income Taxes
Electing Corporate Tax Treatment
LLC Owners and Self-Employment Taxes

5. LLC Management
Member vs. Manager Management
Legal Authority of LLC Members and Managers
Member and Manager Meetings
Member and Manager Voting Rights

6. Starting and Running Your LLC: The Paperwork
Paperwork Required to Form an LLC
Ongoing LLC Paperwork
Securities Filings

7. Getting Legal and Tax Help for Your LLC
Getting Legal Help for Your LLC
Getting Tax Help

Appendixes

Appendix A: State Information
Appendix B: Sample Operating Agreement
Appendix C: Checklist for Forming an LLC

Index
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First Chapter

Chapter 1
An Overview of LLCs
Introduction

The LLC is a relatively new and highly popular alternative to the five traditional ways of doing business: as a sole proprietor, a general partnership, a limited partnership, a C (regular) corporation, and an S corporation. In this book I'll explain not
only how LLCs work and why so many small business people are forming them, but also how the LLC compares to each of these other business forms (see Chapter 2).

By and large, the business media have heralded the arrival of the LLC with unabated enthusiasm. And, in my opinion, this fanfare is justified. The LLC is the first business ownership structure that allows all owners of the business to quickly and easily
achieve the dual goals of "pass through" tax treatment (the same tax treatment sole proprietors and partnerships receive) and limited personal liability protection

A. Basic LLC Features

Now let's look more closely at the specific legal and tax characteristics that make the LLC so attractive and set it apart from the other business ownership structures. As you'll see in Chapter 2, most of the LLC's characteristics are shared by at least
some of the other business structures. What makes the LLC unique is that it's the only business entity with its particular mix of legal and tax attributes -- most importantly, limited personal liability for LLC owners (the same legal protection that
owners of a corporation enjoy) and, unless they elect otherwise, pass-through taxation (like sole proprietors or the owners of a partnership). The legislators who thought up the LLC business structure were smart enough to realize that there was no need
toreinvent the wheel -- all they had to do was combine the best legal and tax aspects of the corporation and the partnership.

A Very Short History of the LLC
The LLC is the American version of a type of business organization that has existed for years in other countries. Specifically, it closely resembles the German GmbH, the French SARL, and the South American Limitada forms of doing business, all of which
allow small groups of individuals to enjoy limited personal liability while operating under partnership-type rules rather than the more complex tax rules that apply to corporations.

In the U.S., the Wyoming legislature enacted the first LLC legislation in 1977, followed by Florida in 1982. In those days, doing business as an LLC was risky, in part because the IRS had not yet made it clear whether it would tax an LLC as a partnership
or a corporation. In fact, because the central promise of the LLC -- to enjoy the tax status of a partnership with the personal liability protection of a corporation -- seemed almost too good to be true, few business owners were brave enough to avail
themselves of this new business model. Similarly, most other states were unwilling to pass legislation authorizing LLCs until the IRS gave its approval.

The first big break in the LLC stalemate came in 1988, when the IRS ruled that an LLC formed under the Wyoming statute was eligible for pass-through tax status. This nod of approval from the IRS created an immediate national wave of enthusiasm for LLCs
in the business press, and all 50 states plus the District of Columbia quickly adopted LLC legislation.

But it wasn't until January 1, 1997 that LLCs really went mainstream. That's when the IRS threw out its old and unnecessarily complicated tax classification regulations, agreeing that multiowner LLCs could henceforth enjoy partnership tax status (and
that one-owner LLCs could be taxed as sole proprietors) without the need to jump through a bunch of previously required technical hoops. And even better, the IRS decided to give LLC owners the flexibility to change their tax status by electing corporate
tax treatment if they wish. (Chapter 4 explains this option.)




Number of Owners (Members)

Contrary to what you may have read just a few years ago, you can now form an LLC with just one person in any state (or the District of Columbia).

While there's no maximum number of owners (legally called "members") an LLC can have, for practical reasons you'll probably want to keep the group reasonably small. There's no magic number here, but any business that's actively owned and operated by more
than about five people risks serious problems maintaining good communication and reaching consensus among the owners.

Of course, if some of your co-owners will be passive investors only -- and you'll have a small management group calling the day-to-day shots -- you can sensibly consider having more owners. (See "Flexible Management Structure," below, for more on this
type of arrangement.) But I still think there is a commonsense limit to the total number of members (including active owners and inactive investors). In my experience, once you get more than about ten investors, you'll find that accounting and
communication issues are likely to use up too much of your time. Outside investors will want to stay informed and may make your business life more complicated if your management choices do not result in increasing profits in future years. Also, the
larger your investor group grows, the more likely you are to run into securities law complexities (see Chapter 6 for more on this).

Limited Personal Liability Protection
The owners of an LLC are not personally liable for the debts of their business or claims made against it (with a few exceptions, discussed in "Exceptions to Owners' Limited Liability," below). This legal protection is written into each state's LLC law.
Because almost every business will accumulate debts and face some risk of being sued, this is a popular -- and valuable -- feature. Without limited personal liability, all business owners are 100% legally responsible to repay these debts, even if they
have to use their own money. With limited liability, their personal assets should remain untouched, even if the business fails under a heavy weight of debts and judgments.

How a Business Can Go Into Debt
Businesses accumulate debt as a routine part of their activities. For example, when sales or net profits are low, employees, suppliers, and other routine business expenses must still be paid. In times like these, a business might take out a loan or use a
line of credit with a bank to handle cash flow fluctuations and pay their bills. Many businesses also defer payment of expenses by buying needed materials and supplies from vendors on account (usually with a 30-day grace period to pay these
balances). In short, there are many reasons why a company, even a successful one, might take on debt as it transacts business.

Example 1: George and Vera quit their day jobs to go into business for themselves. They plan to sell a new brand of wireless modem under an exclusive distributorship license with the modem manufacturer. They believe they can ultimately develop a large
repeat-customer base of consumers who are looking for the latest, easiest way to connect their computers to the Internet. George and Vera realize, however, that it will be slow going at the start of their new venture, which makes them worry about what
will happen if they are not able to resell all the modems they have to buy up front to qualify for their distributorship license. In a worst case scenario, they might even have to close their new business. While they are ready to accept the risk of their
business failing, they are frightened that they could be left so much debt that they might have to sell their personal assets to pay it off, or even declare bankruptcy.

If George and Vera operated their business as a partnership, they would be right to worry, because any debts their business takes on would automatically become their personal debts. But if George and Vera instead form an LLC, they'll have a lot less to
worry about. If their business idea does not succeed, their business debts will not become their personal debts. As long as George and Vera do not personally guarantee (cosign for) any debts of their LLC, they are simply not on the hook for debts the
business cannot repay. They'll be able to go back to their unforeclosed-upon houses, reapply for their day jobs, and start building their dreams and fortunes again.
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  • Posted November 22, 2009

    Lives Up to Its Name

    Nolo's book lives up to its billing as a quick review of the pros and cons of the LLC. It briefly reviews various alternatives, and then the remainder of the book examines the capabilities and limitations of the LLC -- profits, management, how to start/run an LLC, paperwork, losing its advantages, general tax and legal issues, and some forms samples. It examines a key advantage of the LLC's personal liability feature -- the "charging order". A useful tool for those contemplating alternatives to the sole proprietorship.

    2 out of 2 people found this review helpful.

    Was this review helpful? Yes  No   Report this review
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