What is an LLC, and when is it the right choice?
FormationEntity choiceLLCTax
A limited liability company is an entity whose owners, called members, are not personally liable for its debts, and which by default pays no tax of its own: a single-member LLC is ignored for tax and its numbers go on the owner's return, and a multi-member LLC is taxed as a partnership. It has no board, no officers and no stock. Its members or managers run it under an operating agreement that says who decides what, how money goes in and comes out, and what happens when a member leaves. That flexibility is the LLC's whole appeal, and it is also why the operating agreement is the document to get right.
How it is formed
One short filing with the state, a certificate of formation in Delaware or articles of organization in California and most other states, naming the LLC, its registered agent and whether members or managers run it. Then the operating agreement, which is not filed and which every bank and every future buyer will ask to see. A single-member LLC needs one too, because an LLC with no operating agreement is governed by the state's default rules, and a member who cannot show the agreement has a harder time showing the company was kept separate from themselves.
When it is the right choice
When the business will be owned by its founders and will pay them from its profits: a studio, an agency, a consultancy, a product business that funds itself from revenue. Profit is taxed once. Losses in the early years pass through to the members, which a C corporation's losses do not. A holding company for real estate or a single asset is an LLC almost by default. The founders of a business like this gain nothing from a corporation's two-class stock structure and would pay a second layer of tax for the privilege.
When it is not
When the business will raise from venture funds or angel groups, which invest in C corporations and mostly will not hold pass-through interests; when it will give equity to employees, who understand stock options and do not understand profits interests, and who cannot receive incentive stock options from an LLC; and when the founders hope to sell QSBS one day, since an LLC interest is never QSBS. An LLC can convert into a corporation, usually without tax, when the time comes, and some founders start as an LLC for exactly that reason, but a company that knows it will raise within a year saves money and paperwork by forming the corporation now.
Arabella forms LLCs in every state and DC. A single-member, member-managed California operating agreement with a questionnaire that fills it is in the library; a Delaware one follows.
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Written by the lawyers who built Arabella. This is legal information, not legal advice for your situation, and reading it does not make us your lawyers. For a real dispute or a high-stakes decision, talk to a licensed attorney. More questions.