Limited Liability Company - L.L.C.

1.What is a Limited Liability Company?

The Limited Liability Company is the business form of choice for those business owners desiring:

1) protection from individual liability for company debts, negligence, and breaches of contract; and
2) flow through taxation.

The Limited Liability Company is a hybrid between the corporation form of organization and the limited partnership form. The Limited Liability Company protects all members (owners) from individual liability for company debts and misdeeds, much like the corporation. Please note that there are exceptions, such as the treatment of a professional limited liability company (PLLC). What's more, while a creditor of the corporation can attach corporate stock and gain control of the corporation, a creditor of a Limited Liability Company cannot become a member and control the company, a creditor of a Limited Liability Company can only receive an income interest in the company. Consequently, the Limited Liability Company combines the best of corporations and partnerships because the Limited Liability Company offers its members protection from individual liability and, like a limited partnership, allows others to become a member only if the other members agree.

The Limited Liability Company, by election, may be taxed like a sole proprietorship, partnership or S Corporation. As a pass through entity, the Limited Liability Company does not pay federal income tax, rather income is distributed to the members according to their ownership interests and the members report the income on their individual income tax returns. (Please note that an election may be made on IRS Form 8832 to be taxed as a straight C corporation.) Unlike the corporation, the Limited Liability Company is governed by its regulations, also called an operating agreement. Company regulations are a hybrid between corporate bylaws and a partnership agreement. Importantly, the Limited Liability Company is further distinguished from the corporation in that it is not required to have annual meetings. In order to maintain protection from individual liability, the Limited Liability Company must still keep its accounting separate from its individual owners and must have and abide by company regulation.
The Limited Liability Company (LLC) is not a partnership or a corporation. It is a distinct business entity that offers an alternative to partnerships and corporations by combining the corporate advantages of limited liability with the partnership advantage of pass through taxation.

* CAUTION - A recent court ruling has put LLC single member LLC business asset protection into question. In the case of In re Ashley Albright, 2003 Bankr. lexis 291 Bank. D. Colo. April 4, 2003, the court held that when the sole member of an LLC goes into bankruptcy, the bankruptcy trustee then controls the LLC and can then sell its real estate and distribute the proceeds to the bankruptcy estate. The court further held that "...because there were no other members in the LLC, the entire membership interest passed to the bankruptcy estate and the trustee became a 'substituted member'." The court also stated that, "upon the Debtor's bankruptcy filing, the trustee now controls, directly or indirectly all governance of the entity, including decisions regarding liquidation of the entity's assets." The court stated that because there were no other members in the LLC, no written unanimous approval of the transfer was necessary, as would be the case if there were other members -- no matter how small such other membership interest may be.

2.What paper work is required to form a New Hampshire LLC?

To form an LLC, the State of New Hampshire requires two forms to be filed. The first form is LLC 1, Certificate of Formation, which must be filed in duplicate. The second necessary form is form SRA.

The completed forms together with a check for $85.00 made payable to the State of New Hampshire completes the process for the State. If you wish to have a Certificate of Existence (suitable for framing) there is an additional charge of $5.00.

Although it is not an absolute necessity, it is strongly recommended that an operating agreement be used even in the case of a single member LLC. The agreement only strengthens the separation between the owner and the entity, therefore ensuring the liability protection. Without an operating agreement, the entity is governed in accordance with State law.

To review the New Hampshire RSAs which govern LLCs (Chapter 304C, sections 1 through 85) CLICK HERE .

3.Do I need assistance from a professional to form an LLC?

No, professional assistance is not a legal requirement. You can prepare and file the formation paperwork yourself.

However, if you are unsure of what entity would be most beneficial to your business, or how to proceed with the operating agreement, we would be happy to assist you. Contact Us.

4.What should I name my LLC?

Choose the name of your LLC carefully. It is very important that you portray the image you want for your new company. Legally, the name you select must not be deceptively similar to any existing LLC in your state.

For example, if an LLC named North LLC exists in your state, you probably would not be allowed to name your business North Limited Liability Company. It is possible that the name you select will not be distinguishable; therefore, we suggest calling the State to check on your name's availability. You may call the State at (603)271-3246 to see if the name you want is available. The office hours are from 9:00 am to 12:00 noon and 1:00 pm to 3:30 pm Monday - Friday. It is very difficult to get through, so be patient.

The name you select must show your business is a Limited Liability Company, so it must include the words "Limited Liability Company," or the abbreviation LLC or L.L.C..

5.How many people are needed to form an LLC?

All 50 states now allow single member LLCs with one of the last hold outs, Massachusetts adopting a single member LLC statute in March 2003 allowing single member LLCs.

The IRS permits single member LLCs and classifies them as null entities that pass through tax treatment to the owner's personal tax return; however, taxation of single member LLCs at the state level may be different.

6.How is an LLC taxed?

An advantage of the LLC is its tax flexibility - the members of the LLC are allowed to irrevocably select how the entity will be taxed.

Most LLCs elect to be taxed as a partnerships or as a disregarded entity. This means that the LLC is treated as a pass through entity, paying no separate entity level tax.

On the other hand, the LLC could elect to be taxed as a corporation by completing IRS Form 8832. If this election is made, the LLC would pay a separate entity level tax. This choice may be advantageous if the LLC owners want to retain profits in the business and would prefer to have these retained earnings taxed at the corporate income tax rate as opposed to the personal rate.

7.What is the organizational structure of an LLC?

An LLC is owned by its members. They are analogous to partners in a partnership or shareholders in a corporation, depending on the how the LLC is managed. A member will more closely resemble a shareholder if the LLC utilizes the operating concept of a manager or managers because then the members will not participate in management. If the LLC does not utilize managers, then the members will closely resemble partners because they will have a direct say in the decision making of the company. A member's ownership of an LLC is represented by their "interests," just as partners have "interest" in a partnership and shareholders have stock in a corporation.

8.How is an LLC managed?

An LLC may be managed by its members (owners) or by selected managers.
If the LLC is to be managed by its members, it operates much like a partnership. Each member has an equal say in the decision making process of the company or alternatively, as you specify in the LLC's operating agreement.

If the members choose, they may elect a manager or managers to act in a capacity similar to a corporation's board of directors. These managers are in charge of the affairs of the corporation.
Member management is the normal default rule of NH state law. This means that if managers are not selected in the articles of organization the members will direct the affairs of the LLC.

9.What are the advantages of an LLC?

LLCs offer numerous advantages.

1. Flexibility in choosing federal taxation.
The most common selection for an LLC is pass through taxation. This means that earnings of an LLC are taxed only once. The earnings of an LLC are treated like the earnings from a partnership, sole proprietorships and most S corporations. Alternatively, the entity may be taxed as a regular C corporation.

2. Limited Liability
The LLC owner's liability is generally limited to the amount of money which the person has invested in the LLC. Thus, LLC members are offered the same limited liability protection as a corporation's shareholders, provided that they do not otherwise assume liability personally.

3. Flexible Management Structure and Flexible Ownership is Permitted Like general partnerships, LLCs are generally free to establish any organizational structure agreed on by its members. Thus, profit interests may be separated from voting interests (not permitted if the S corporation form is chosen).

10.What are the disadvantages of an LLC?

The disadvantages of an LLC include:

1. More paperwork than a ordinary partnership or proprietorship.

11.What is a Registered Agent and Why Do I Need One?

State laws require corporations and LLCs to maintain a registered agent in the state that you form your business. The agent's name and office address are included in the articles of incorporation to give public notice of where to send important documents to your corporation.

The registered agent is responsible for receiving important legal and tax documents including: service of process, franchise tax forms and annual report forms.

If you incorporate in the state where your business is located, an officer, director, or employee can act as your corporation's registered agent.

12.Should I choose an LLC or an S corporation?

While the S corporation's special tax status eliminates double taxation, it lacks the flexibility of an LLC in allocating income to the owners.

An LLC may offer several classes of membership interests while an S corporation may only have one class of stock.

Any number of individuals or entities may own interests in an LLC. However, ownership interest in an S corporation is limited to no more than 75 shareholders. Also, S corporations cannot be owned by C corporations, certain trusts, LLCs, partnerships or nonresident aliens.
LLCs are allowed to have subsidiaries without restriction.

13.What are the self employment aspects of an LLC?

As a self employed individual, that is a single member LLC electing to be disregarded as a separate entity, your income and expenses from the LLC will be reported on Schedule C of your personal tax return (Form 1040). What this will mean is that the net income (gross income less allowable deductions) will be subject to self employment tax. The self employment tax is currently calculated by multiplying your net profit by .9235, if that amount is less than $72,600 then multiply the resulting number by .153 (see example 1). All income up to $72,600 is subject to Social Security and Medicare tax. Income above $72,600 is subject only to Medicare tax. So if your profit is higher than $72,600 you would need to multiply the resulting number by .029 (instead of the .153) and add $9,002.40 to the resulting number (see example 2).

Example 1: If your net profit was $10,000 the self employment tax would be calculated as follows:
$10,000 x .9235 = $9,235.00
$9,235.00 x .153 = $1,412.96 This would be the resulting self employment tax.

Example 2: If your net profit was $100,000 the self employment tax would be calculated as follows:
$100,000 x .9235 = $92,350.00
$92,350.00 x .029 = $2,678.15
$2,678.15 + $9,002.40 = $11,680.55 This would be the resulting self employment tax.
The net profit less one half of the self employment tax is then subject to tax at your tax rate, based on your income from all sources.

14.How are Professional Limited Liability Companies (PLLC) treated?

A professional limited liability company means a limited liability company for profit organized for the purpose of rendering professional services. Professional services mean any service which may lawfully be rendered only by certified public accountants, public accountants, architects, attorneys, podiatrists, chiropractors, dentists, pharmacists, professional engineers, land surveyors, registered professional nurses, optometrists, physicians and surgeons, psychologists, veterinarians, and all other professionals licensed, registered, certified, or otherwise authorized and permitted to practice independently under the provisions of RSA 309-A, 310-A, 311, 315, 316-A, 317-A, 318, 326-B, 327, 329, 330-A, or 332-B.
The LLC must end with either the words professional limited liability company or P.L.L.C.
Unlike the traditional LLC, under TITLE 28, Partnerships, CHAPTER 304D, Professional Limited Liability Companies, SECTION 304-D:9

II. Every individual who renders professional services as a member, manager, or employee of a professional limited liability company shall be liable for any negligent or wrongful act or omission in which he personally participates to the same extent as if he rendered the services as a sole practitioner. A member, manager, or employee of a professional limited liability company shall not be liable for the conduct of other members, managers, or employees unless he is at fault in appointing, supervising, or cooperating with them.

This type of entity does not provide limited liability protection.

15.Getting Started

We have provided instructions and fill-in forms for IRS forms SS-4 and 8832 which allow you to enter information while the form is displayed by an Adobe Acrobat 3.0 (or later) product. You will then need to print the completed form out. Fill-in forms give you a cleaner crisper printout for your records and for filing with the IRS.

Caution: The Acrobat Reader does not allow you to save your fill-in form to disk, accordingly, it's best to print them out and manually fill in the information..
The linked files require adobe reader to view if you do not have it download it here.

The remaining necessary State of New Hampshire forms LLC 1 and SRA also must be viewed in adobe, They are also interactive and the same instructions should be followed as for the IRS forms above. Remember to print and complete form LLC 1 (in duplicate).

There are many different types of business entities and the tax consequences vary a great deal within each business type and from state to state. With that said, if you already know which business structure is right for you, you can begin the administrative process of filing right here!
You will need to have a name picked out and know who will be the registered agent for the LLC.
After you decide to form an LLC, articles of organization (LLC formation paperwork) must be filed with the State of New Hampshire and initial filing fees must be paid.

The articles of organization include forms LLC 1 (in duplicate ) and form SRA. Click here to go to the instructions and the forms. The filing fees are $85.00 and an additional $5.00 if you would like a Certificate of Existence (this is not required).

You have the option of either mailing the forms to the State and waiting for the confirmation of the formation. The State is currently 12-14 weeks behind in the processing of the confirmations. According to the State, there is only a one day turn around for the mailing of the Certificate of Existence, if one is requested. The second option is that you may actually hand deliver the documents and wait while they are processed. There is an additional processing fee of $30.00 for the expedited service that the second option provides. This option will get you a Certificate of Existence.

After your Articles are filed, your LLC should have an organizational meeting where an operating agreement is adopted, interest certificates are distributed and other preliminary matters are completed.
After your LLC has been formed, if the entity will have employees, or elect partnership or corporate taxation, the entity will need an Employer Identification Number (EIN). If the entity is a single member LLC with no employees, this will not be necessary as the entity will use the social security number of the single member. If an EIN is necessary, an IRS Form SS-4 (PDF 87KB), Application for Employer Identification Number, will need to be completed.

The final form to be filed is IRS Form 8832 (PDF 46KB), Entity Classification Election. You have 75 days from the effective formation date of the LLC in which to select your choice of entity. Each classification does have a default election, if not filed within the 75 days. One signed copy will be mailed to the IRS and one will be filed with the entities’ tax return for the year of formation.

16. Rules for LLC formation in states other than New Hampshire.

Below is a list of links for various state requirements for LLC formation.

FLORIDA

If you need help

Of course, if you need help, we are available to assist you, for help email our LLC specialist; simple set up charges, excluding an operating agreement are $500 or less including State of N.H. registration fee!.

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