Limited Liability Company

Limited liability companies (LLCs) have become the most common type of new business since their introduction by state laws in the last 30 years because LLCs combine the tax advantages of partnerships with the limited liability of corporations. This business form may be a good option for a website or blog with significant liability exposure. Owners of an LLC are called "members." You can operate an LLC as the sole owner (single-member) or in conjunction with fellow owners (multi-member). Members can run the business by themselves, or hire employees and/or independent contractors to carry out tasks for them. Among other requirements discussed below, an LLC is formed by filing articles of organization with the state and executing a formal operating agreement, which sets down ground rules for what capital contributions are required from the members, how the business will be managed, and how profits and losses will be allocated, among other things.

In determining whether you want to operate as an LLC, you may want to consider the following factors:

  • Liability: Members of an LLC enjoy limited liability for the debts and obligations of the business, including liability for the unlawful acts of other members and employees. For instance, if a fellow member writes a defamatory article or posts copyright infringing material on your jointly-run website or blog, then your liability ordinarily is limited to amounts invested in the LLC. The same goes for a defamatory article or infringing post published by an employee of the LLC on the company website. However, limited liability does not relieve you from personal liability for your own unlawful actions.
  • LLCs, like corporations, are subject to the legal doctrine known as "piercing the corporate veil," which can result in members losing limited liability protection in extremely rare circumstances.

  • If you apply for a small business loan, the lender probably will require you to give a personal guarantee. In that case, you are personally responsible for the paying back the debt, even if the business is an LLC and even if there is no basis for piercing the corporate veil.
  • Formation: Forming an LLC is moderate in terms of burden and cost. Please see the Forming an LLC section for details on the required (and advisable) steps. It requires filing articles of organization with a state office, usually the Secretary of State. Creating and submitting articles of organization for an LLC is simple and generally does not require the assistance of a lawyer, but there usually are significant filing fees. LLCs do not have the perpetual existence of corporations, and many states require that the duration of the LLC be specified in the articles of organization. You and your fellow members should also draft and execute a operating agreement, and some states require this. Drafting one that is highly customized to your business may involve some complexity. It will be up to you and your fellow members whether the assistance of a lawyer is required.

  • Management Structure: You have a great deal of flexibility in how you structure the management of an LLC because members may designate their desired management structure in the operating agreement. In general, LLCs are attractive because they allow for an informal, de-centralized management style with the members taking direct control over the day-to-day management of the business.
  • It is important to include a clause regarding the desired management structure in the articles of organization, in addition to the operating agreement, to make sure the members' choice of structure is honored under state law.
  • Operation: Operating an LLC is moderate in terms of burden and cost. As a general matter, there are fewer formalities associated with running an LLC than a corporation, and members can customize meeting, voting, and other operating procedures in the the operating agreement. However, in order to maintain their limited liability protection, members should observe certain formalities, such as keeping detailed financial records and recording minutes of major decisions. Additionally, state laws impose record-keeping requirements, as well as annual or biennial reporting requirements (and fees), all of which tend to drive up the cost of operating as an LLC. Some states place an annual franchise tax on LLCs. For details on annual/biennial reporting requirements, fees, and franchise taxes, see the the State Law: Forming an LLC section. This is all in addition to the tax and other regulatory obligations imposed on all small businesses. For more on the tax obligations of small businesses, see the Tax Obligations of Small Businesses section and the IRS's informational guide, Publication 583 (1/2007), Starting a Business and Keeping Records.

  • Ownership of Assets/Distribution of Profits: Assets of the LLC, including those originally contributed by members, are owned by the company, not by the individual members. The property rights of LLC members include rights in management and control of the business and financial rights to share in profits, distributions, and other financial benefits. Allocation of profits among members is generally set in the operating agreement, and members are free to structure the distribution any way they please. Absent a provision in the operating agreement, state law will determine whether profits and losses are distributed on a per capita basis (i.e., 4 members, each get 1/4 share) or based on the amount of capital contributed to the business. While a member's economic rights in an LLC may be transferred, the transferee cannot become a full member of the LLC unless the other LLC members unanimously consent.
  • Among the most important assets of any business that operates a website or blog are its articles, posts, videos, and other content. For details on who owns what from a copyright perspective, see the Copyright Ownership of Articles and Posts section.
  • Tax Treatment: Members of an LLC can choose to be taxed as a partnership or a corporation. If the LLC is treated as a partnership (which in the case of an LLC with multiple members, it would be absent the election below), then the LLC's income and expenses are "passed through" to the members, and they pay tax on their share of the profits at their individual income tax rates. In this way, they generally are not subject to the "double taxation" associated with corporations. If members elect to have the LLC taxed as a corporation using a Form 8832 - Entity Classification Election, the LLC will file its own income tax returns.  Members need not file Form 8832 if  they want the LLC treated as a partnership because the default entity is a partnership. Special, but similar, rules apply for single-member LLCs. For details on the tax obligations of LLCs, see the Limited Liability Company page on the IRS website.

  • Other Considerations: If you want your LLC to "do business" in states other than the one in which it is organized, you need to register as a "foreign" company doing business in that state. You do not need to do this simply because your website reaches the residents of other states. It might be an issue, however, if one of the members of the LLC worked (i.e., contributed content to the website or blog) from another state, and it would likely be required if your LLC had an office there. State procedures for obtaining this registration vary, but commonly there is a specific form that you need to complete, and you will need to submit copies of the articles of organization and a certificate of good standing from your state. There will also be a registration fee. To get the process started, you should visit the Secretary of State's website for the state in which you want to register.

Articles of Organization

You must file formal articles of organization with your state (usually with the Secretary of State) and pay a filing fee in order to form an LLC. The filing fee generally ranges between $70 and $200 depending on the state, but certain states have higher fees (e.g., Illinois ($500), Massachusetts ($500), and Texas ($300)). See the State Law: Forming an LLC section for details on state filing fees.

The articles function like the constitution for the LLC. Ordinarily, the document is short and simple, and you can prepare your own in a few minutes by filling in the form provided by your state's filing office or preparing your own based on a sample. Generally, all of the members may prepare and sign the articles, or they can appoint one person to do so. Each state has its own required version of this document, so the precise requirements may vary. Below is a list of some of the most common information required by the states:

  • Company Name: You must set forth the name of the LLC, which must distinguish it from other companies and identify it as a limited liability company. For more on naming requirements, see the state pages on forming an LLC.
  • Name and Address of Registered Agent: Most states require the name and address (not a P.O. Box) of the LLC's registered agent in the state of formation. The purpose of the registered agent is to provide a legal address for service of process in the event of a lawsuit. The registered agent is also where the state government sends official documents required each year for tax and legal purposes. If your LLC organizes in the same state where you do business, a member or employee of the LLC can usually serve as the registered agent. If your LLC organizes in a state other than where it does business, then you will have to hire a registered agent in the state of organization. You can find and hire registered agent service companies online, and frequently they can answer questions and provide other assistance with the formation process.
  • Legal Address of the Company: Some states require that you include the address of the LLC's principal office (whether or not that address is inside or outside the state of organization). This is distinct from the address of the registered agent discussed above, although in some circumstances this address could be the same (i.e., when a member or employee is serving as the registered agent).
  • Business Purpose: Some states require a statement about the LLC's "business purpose." Most states allow a general clause stating that the company is formed to engage in "all lawful business." It is a good idea to use this general language to avoid constraining your business activities in the future should the business move in unanticipated directions.
  • Names and Addresses of Initial Members: Most states require the articles to list the name and addresses of the initial members (i.e., owners), especially if the business will be managed by its members.
  • Name and Address of the LLC's Organizer: Most states require the articles to list the name and address of the person filing the articles. A signature will be required as well.
  • Desired Management Structure: You should state whether the LLC is to be managed by its members in a de-centralized fashion ("member-managed") or by some designated group of "managers" (who may or may not be members as well) in a centralized fashion ("manager-managed"). Most state forms have a box relating to this issue on their prepared form.
  • Duration of the Firm and Whether the Members Can Continue the LLC After a Member Dissociates: Many states require that the duration of the firm be specified in the articles of organization. You also may want to include a statement indicating whether the LLC can continue after a member withdraws from the business.

You can find the required forms and sample articles of organization for the fifteen most populous U.S. states and the District of Columbia in the state pages on forming an LLC.

If you want to amend the articles of organization, you can do so by filing articles of amendment with the same official to whom you submitted the original. Usually there is a prepared form.

Operating Agreement

An operating agreement is the basic written agreement between the members (i.e., owners) of the LLC, or between the members and the managers of the company, if there are managers. In most states, creating an operating agreement is not a legal requirement, but it is highly advisable for the smooth operation of your business and for avoiding internal disputes. Even if you will form a single-member LLC, you should create an operating agreement between yourself (as a member) and the company in order to separate your business and personal affairs. Many states have laws saying that an operating agreement for a single-member LLC is not invalid simply because only one individual signed the document.

Although there is no set criteria for the content of an operating agreement, it usually covers topics such as:

  • the initial members of the LLC;
  • the members' percentage interests in the business;
  • the allocation of profits and losses among members;
  • the capital contributions of members;
  • the members' voting power;
  • the desired management structure -- i.e., whether the LLC is to be managed by its members in a de-centralized fashion ("member-managed") or by some designated group of managers (who may or may not be members as well) in a centralized fashion ("manager-managed");
  • in the event that the company will be run by managers (or some subset of the members), the agreement should set out the division of responsibility between managers and members, and describe the roles that managers and members are expected to play in operating the business;
  • procedures for admitting new members and for member withdrawal;
  • rules for holding meetings and taking votes; and
  • "buy-sell" provisions, which set out rules for what to do when a member wants to sell his or her interest, dies, or becomes disabled.

Free sample operating agreements for most U.S. states are available from the Internet Legal Research Group. Whether or not you need the assistance of a lawyer to craft a good operating agreement depends upon the level of customization you want to achieve.

An operating agreements does not have to be filed with the state like the articles of organization, and they may be changed without officially filing amendments. If you do alter the agreement, remember to keep a copy of the previous version on file.

LLC Records

The amount of paperwork and other formalities required by state governments in order to form and properly maintain a limited liability company should not be underestimated. In addition to the two major "constitutional" documents (the articles of organization and the operating agreement), LLCs are required to keep copies of a number of other records relating to the the organization, finances, and ownership of the business.

State record-keeping requirements vary. You can find links to your state's specific record-keeping requirements in the state pages on forming an LLC. However, as a matter of best practices you should keep copies of the following documents in the company's principal office in the state in which it was formed:

  • the articles of organization and any amendments to it;

  • the certificate of organization or other official paperwork mailed to you by the state after filing articles;

  • a current list of the full names and last known addresses of all past and present members;

  • a current list of the full names and last known addresses of all past and present managers;

  • all federal, state, and local income tax returns for the last three years;

  • Any other financial statements from the last three years;

  • all written operating agreements used currently or in the past;

  • any other documents filed with the state concerning the LLC; and

  • documentation of the following, either in the articles of organization, operating agreement, or other document:

    • the amount of capital contributions of each member in terms of cash or agreed value of other property or services contributed;

    • details of events, times, or other agreements made for further contributions to be made from members, if any;

    • the share of profits and losses due each member;

    • any right of a member to receive distributions of funds;

    • any right of a manager to make distributions of funds to a member;

    • each member's respective voting rights;

    • details of events that would cause the LLC to be dissolved and its affairs wound up, if any.

These requirements are in addition to those required for all small businesses for tax purposes. For more on the tax obligations of small businesses, see the Tax Obligations of Small Businesses section and the IRS's informational guide, Publication 583 (1/2007), Starting a Business and Keeping Records.