Question

1. How are LLCs formed? What are the two options for managing limited liability companies? What steps are required to bring a corporation into existence? What is piercing the corporate veil? What is the difference between an S Corp and a C corp?

Answer 1

A limited liability company (LLC) is the US-specific form of a private limited company. An LLC is a hybrid form of business entity which has some features of a corporation and a partnership. It has the pass-through taxation benefit like a partnership firm, provides flexibility in operation and management and like a common stock company has limited liability.

Steps to Form an LLC :

1. Choose a Name for Your LLC - The name of your LLC must comply with your state’s rules and these rules differ in different states.

2. File Articles of Organization - To create your LLC, you must file articles of organization with your state's corporate filing office

3. Choose a Registered Agent - LLCs are required to have a registered agent. The registered agent is an individual or company that agrees to accept legal papers on behalf of the LLC if it is sued. The registered agent must have a physical street address in the state where the LLC is registered.

4. Decide on Member vs. Manager Management - Most small LLCs choose to be managed directly by their members, but LLCs can appoint one or more people (outsiders) to manage the LLC, somewhat like a board of directors oversees a corporation.

5. Create an LLC Operating Agreement - Even though most states don’t require it, you should have an operating agreement for your LLC. This is an internal document that establishes how your LLC will be run, including how the LLC will be managed.

6. Comply With Tax and Regulatory Requirements - Additional tax and regulatory requirements may apply to your LLC.

7. File Annual Reports - Many states require LLCs to file an annual report with a filing fee.

8. Out of State LLC Registration - To do business in a state other than the state where your LLC was formed, you will need to register your LLC in that state and appoint a registered agent for service of process.

Two options for managing limited liability companies :

1. Member-managed LLC: all of the members participate in management, and decisions are made by majority vote.

2. Manager-managed LLC: the members designate a group or group of persons to manage the firm. management group can consist of members and/or nonmembers.

The steps involved in bringing a corporation into existence are:

1. Select the state of theincorporation.

2. Secure the corporate name by confirming its availability.

3. Prepare the articles of incorporation.

4. File the articles of incorporation with the secretary of state accompanied by payment of the specified fees.

Piercing the corporate veil :

The phrase “piercing the corporate veil” refers to the removal of the legal separation of shareholders and the corporation itself. Usually a corporation is treated as a separate legal person, which is solely responsible for the debts it incurs and the sole beneficiary of the assets it owns. Common law countries usually uphold this principle of separate legal entity, but in exceptional situations may "pierce" or "lift" the corporate veil.

Difference between an S Corp and a C corp :

Taxation : C corps are separately taxable entities. They file a corporate tax return and pay taxes at the corporate level. They also face the possibility of double taxation if corporate income is distributed to business owners as dividends, which are considered personal taxable income. Corporate income tax is paid first at the corporate level and again at the individual level on dividends. While in case of S corps, they are pass-through taxation entities. They file an informational federal return, but no income tax is paid at the corporate level. The profits/losses of the business are instead “passed-through” to the business and reported on the owners’ personal tax returns. Any tax due is paid at the individual level by the owners.

Shareholder restrictions : S corps are restricted to no more than 100 shareholders, and shareholders must be US citizens/residents. C corporations have no restrictions on ownership.

Stock : S corporations can have only one class of stock (disregarding voting rights), while C corporations can have multiple classes.

Ownership : S corporations cannot be owned by C corporations, other S corporations (with some exceptions), LLCs, partnerships or many trusts.