Management / Ownership / Registered Agent FAQ

I am wanting to remove my wife as a member from the LLC. What needs to be done? We live in Texas.

I am wanting to remove my wife as a member from the LLC. What needs to be done? We live in Texas.

 

 

Our Response: Before going forward with removing a member, be sure there are no stipulations in your operating agreement that may require board action.  If there are no stipulations, you and your wife are the only members or there is no operating agreement, LLCs can easily remove members change management by making a record of the change internally and then update the records with the Secretary of State.

 

There are two items to complete with the Secretary of State.  First, LLC’s need to update their officer information each year on the Public Information Report which is filed with the Texas Comptroller of Public Accounts. This information is then sent to the SOS and the records are updated. Next, even though amendments are not required, it’s a good idea to file an amendment to update management information with the SOS, which the form is found here – https://www.sos.state.tx.us/corp/forms/424_boc.pdf.

Adding A New Member To An LLC

I started my LLC in 2015, and I got an EIN for single-member. Now I need to add my dad to the LLC. So, I am going to get a new EIN?

Do I need to file form 8832 to notify them of the change from proprietorship classification to partnership-classification.

Since, partnership-classification is the default for multi-member do I need to file this form, or is getting a new EIN sufficient.

– Chirag, New Jersey

Answer

You don’t need a new EIN when you add members to an LLC (unless you never got an EIN for your LLC and were simply using your personal Social Security Number).

Merely changing tax classifications does NOT require a new EIN.

You will have to change your tax classification (using Form 8832 as you mention in your question) from single member disregarded entity to a multi-member LLC (partnership taxation).

From now on, you’ll be filing 1065 partnership returns, and giving each member (yourself and your dad) a K-1 from the 1065 stating your share of profits or losses to report on your own 1040.

When you add a new member to your LLC, be sure to document this in your written Operating Agreement. At the very minimum, you should document the following in writing:

  1. The consideration paid by the new member for admission to the LLC (e.g. money, services to be performed, contributions of equipment or real estate, etc.);
  2. The amount of membership units being acquired (i.e. “shares” of the LLC);
  3. The effective date of the transaction;
  4. Voting rights of the new member (are they proportional to the new member’s interest or is the new member passive with no voting rights?);
  5. Whether existing members have a right of first refusal to purchase the new member’s shares if one day he wishes to sell his membership units and how price of those shares would be calculated.

All of the above, and more, will be described in your new Operating Agreement: how membership units (shares) are allocated between you and the new member, how profits and losses are allocated, whether a member can sell his/her shares to an outsider without offering the other members right of first refusal, and many other issues.

Logistics of Adding a New LLC Member

While you are legally allowed to draft your own Operating Agreement without a lawyer, there are probably many issues you wouldn’t think of on your own. For example, how many of the five issues listed above did you think about before I listed them for you? Probably not all of them.

Therefore, it is a good idea to get some help with your Operating Agreement.

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Do I Need A Registered Agent For My LLC?

Here is my case
I will be the only owner and employee of my LLC , LLC will be in Dallas,TX
It would be an IT Staffing company LLC address is going to be my apartment address in Dallas Texas.

Question

1. What registered agent means ? What he do ?
2. Do i have to have one?
3. Can I be my registered agent
4  Do i need Operational agreement as i m the only member
5  If so where do i need to send it i mean what to do with that agreement
6. What is veil Piercing ? LLC owner have to worry about it ?
7. How difficult to form an LLC by my self . What an advantage to hire a lawyer or do it online with any other company like LZ

Thanks

– Kalia, Texas

Answer

1. A registered agent (aka resident agent) is the person assigned to receive service of process for your LLCs. A registered agent located in the state of Texas is required for every Texas LLC.

You can act as your own registered agent if you choose.

2. See above. Yes, your LLC is required to have a registered agent.

3. See above. You can act as your own registered agent. The list of registered agents is public information, and therefore you will get lots of junk mail after forming your LLC if you are your own registered agent.

4. Most states do not require a written Operating Agreement. If you fail to create an Operating Agreement, your LLC will be subject to the default laws under Texas’ LLC act.

It is a good idea to have an Operating Agreement, even for a single member LLC.

5. Operating Agreements are not filed with the State, but are instead private contracts governing the management and operation of your LLC.

6. Veil piercing is when a judge allows a creditor of your business to seek a judgment against your personal assets, on the basis that your LLC is actually no different from yourself. The legal term is that your LLC is an “alter ego” of the owner.

Factors for veil piercing include commingling of business and personal funds, fraud, zero capitalization of your LLC, ignoring LLC formalities, and fraud.

Every business potentially has to worry about veil piercing, not just LLCs. The important things to remember are that you should follow corporate formalities (which is relatively simple with an LLC compared to a c corporation–Legalzoom’s LLC formation service includes guides on maintaining your LLC legally), not commingle funds, and not commit fraud.

Be sure to sign all contracts on behalf of your LLC as “John Smith, Member of XYZ, LLC”, and not as “John Smith”.

7. Filling out an Articles of Organization form for Texas is not particularly difficult, depending on how familiar you are with completing government forms.

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Should I Add My Non-Participating Spouse As A Member To A New LLC

I am planning to start a service business that I will operate independently. My wife will not formally participate in the business except as an informal adviser. I’m stuck on the question of whether to add her as a member or not, and if yes, at what capital contribution level.

Are there tax benefits and estate planning benefits (what happens to the LLC if I die) to adding her now as a member? Note, all of our personal funds are held jointly, so capital contribution I provide is really from both of us.

Thank you for any insight you can give.

Regards,
– Jim, Minnesota

Answer

For a married couple filing joint tax returns, I don’t really see how adding your spouse as a member will cut your taxes.

I really am not knowledgeable enough on estate planning to tell you if there are estate planning benefits. What I remember from studying for the bar exam is about enough to be dangerous 🙂

In terms of what happens to your LLC interest when you die, it, like all other assets, passes into your estate to be distributed according to your will (if you have one), or according to the laws of the state where you resided at the time of your death.

This is called probate, and it involves the courts and, depending on your state, can be a 6-12 month process or longer if there is a will contest.

You should take a look at placing your LLC membership interest in a living trust so that your wife can take ownership of it in the event of your death without having to go through the probate process.

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Which Is Better – Single-Member LLC Or Multi-Member LLC

My wife and I are considering starting a business in Arizona providing therapy services to children. We have chosen to form an LLC and are not sure whether to classify as multi-member or single member. We have read numerous letters and blogs indicating advantages and disadvantages for each and still remain undecided. What do you think is the best option for us?

– Ryan, Arizona

Answer

The first question you need to answer is whether you both want to be owners of the LLC, or just one.

Obviously, a single member LLC is the way to go if just one of you wants to own the LLC.

If you both own the LLC, then it’s not really “single member” anymore. However, as a husband and wife as to sole owners, you can elect disregarded entity status and avoid having to file Form 1065.

Instead, all your profits and losses would be recorded on your Schedule C of your 1040 (the “normal” tax return you file each year).

As far as whether you should both own shares in the LLC…

There are probably family law (e.g. in the event of divorce) considerations to who owns shares in the LLC, though it gets very complicated, and I’m not familiar with Arizona family. My understanding is that many western states are community property, which is different from what we have here in Missouri. Therefore, any family law issues would have to be addressed by an Arizona attorney.

On a general note, in terms of asset protection (after incorporating), your best bets are to:

1. Have adequate insurance;

2. Don’t be negligent.

The perception in the media is that any idiot plaintiff’s lawyer with a copy machine can win multimillion dollar verdicts on nothing more than a trip and fall.

The reality is far different.

You are more likely to be impoverished in business through employee fraud/embezzlement, lawsuits by your partners/investors, or lawsuit with suppliers and customers than to be bankrupted by a slip and fall plaintiff.

So, while incorporation makes logical sense, it’s important to purchase quality liability insurance. Then when there is a lawsuit you can hand the whole matter over to the insurance company’s lawyers.

Particularly because your business is dealing with children, having adequate insurance (at least $500,000 – $1,000,000) in case a child is injured is essential. Any plaintiff’s lawyer will take the insurance money over having to chase you personally into bankruptcy.

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Can A Non U.S. Person Be A Member Of An LLC?

Can a non-us person be a member of an LLC?

– David, Florida

Answer

Yes. Unlike S-corporations, LLCs can have non-US citizens as members. If you wish to have your LLC taxed as an S-corporation, then obviously, no non-US members are allowed (and the LLC must follow the other S-corporation requirements as well).

In fact, pretty much any entity can be a member of an LLC, including:

  1. A US citizen.
  2. Non-US citizen.
  3. An LLC.
  4. A corporation.
  5. A trust.
  6. A partnership.

Other Questions about who can be an LLC Member: Can a member be a foreign limited company?

I have formed a LLC company and I need to include a member’s name. Can this member a foreign limited company? –By Bernard, Columbia, Mo, USA)

Answer

Foreign LLCs can be members of another LLC. Unlike, for example, S-corporations, there are no restrictions on the type of entity the member of an LLC can be.

Any of the following can be a member of an LLC: individuals (both US citizen and non-US citizens), trusts, corporations, LLCs, partnerships, limited partnerships.

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Can A Trust Be The Single Member Of An LLC In Illinois? If So, What Are The Practical Considerations, Advantages And Disadvantages?

Can a trust be the single member of an llc in Illinois? If so, what are the practical considerations, advantages and disadvantages?

– Mike, Illinois

Answer

Yes.

Illinois permits single member LLCs, and a trust (including a living trust) can be that single member.

As far as the advantages and disadvantages, you’d probably need to speak with an attorney or CPA.

One possible advantage with the living trust is to keep your LLC out of probate in the event of the single member’s death, and instead have ownership transferred via the living trust. However, you’re going to need professional help with this more complex situation.

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Can An LLC Be Sold?

Can an llc be sold?

– Sam, Illinois

Answer

Yes.

A limited liability company absolutely can be sold. A member can sell his or her membership interest, or, all the members can sell their interests to a single buyer, or all the members can agree to sell all the assets of the LLC to a buyer.

Some LLCs will place clauses in their Operating Agreement preventing members from selling their interests to outsides without first offering existing members the opportunity to purchase. This is a relatively common provision, but it is not mandatory, and your LLC could permit free exchange of membership interests.

A “membership interest” is similar to the concept of “shares” in a corporation. If you own 40% of the membership interest in an LLC, it’s like owning 40% of the stock in a corporation (LLCs have many similar concepts as corporations, but different terminology).

These transfers of LLC interests involve contracts and paperwork, of course.

If you have a particularly complicated transaction, you ought to have a lawyer take a look at it. However, providing your lawyer with form documents to begin from will make their job easier, faster and likely result in a lower legal bill (sometimes substantially lower).

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Can an LLC Pay Members an Hourly Wage that Varies on a Project-to-Project Basis?

Can an LLC pay its members an hourly wage, which is tied directly to the number of service hours contributed to the enterprise, and perhaps even to a percentage of the actual money brought in on a given money earning project? Can these hourly payments be considered “guaranteed payments,” in the same way that a flat salary paid to members would be?

Here’s the situation: my friends are starting an LLC to provide web design, programming, and multimedia services to business clients. One member is a designer, one is a multimedia specialist, the third a programmer. They anticipate that the amount of money they will bring in, and how much of that money is due to the contributions of any one of the three contributing members, will vary widely depending on the project. Some varying factors would include:

(1) The hourly rate charged to clients for design, multimedia, and programming components will depend on the complexity of the project. A different hourly rate would apply to each component. So for instance; a job may demand complex programming but easy multimedia, and so the programming rate would be set much higher than the multimedia rate.

(2) Also, there could be projects that demand, for example, many more hours of labor from the designer than of the multimedia specialist or programmer, and vice versa.

Basically, they are struggling with the issue of how to set up a compensation system that guarantees each member a fair return for their contributions — which may, depending on the jobs they get, end up being grossly disproportionate to other members’ contributions.

– Eliana, North Carolina

Answer

You have a complicated setup here, but it is possible.

Guaranteed payments are the way in which LLC members are compensated for their labor contributed to the LLC.

I have seen LLC operating agreements where members agree on a set guaranteed payment for each member, with bonuses determined at the end of the year based on productivity of each member. This is common among professional practices (medical offices, law firms, etc.)

In a law firm, for example, each member/partner would take a year-end bonus based on some formula related to billable hours. In a medical practice, it could be based on revenue generated from patient billings minus the member’s proportionate share of expenses.

I would think a similar model could apply to web development.

While nearly any conceivable compensation arrangement can be written into your operating agreement, the important thing is that what is written is what each person had in mind.

Secondly, you’re going to want quality accounting software that lets all the members see exactly what their efforts earned and what expenses were associated with their earnings.

For example, you could have a business where one member brings in 50% of revenue, but uses 80% of expenses. He might claim 50% of profits, but the other members might object, pointing out that he generated more expenses than revenue, and therefore should be entitled to a smaller share.

You need to decide:

1. How revenue is counted.
2. How expense are allocated between the partners.
3. How to value “intangible” value added to the company.
4. When this performance based compensation is paid (at the end of each month, annual bonuses, etc.)

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Can A C-Corp Own an LLC?

Can a c-corporation be the sole member of an LLC and if so how report income/loss…..

Answer

Yes, an LLC can have a C-corporation as its member.

The LLC’s income would pass-through to the c-corporation. The c-corporation would report the profit/loss on its own tax return.

Remember that unlike LLCs, a c-corporation files its own tax return separate from its owner(s).

I would suggest speaking to a professional (attorney / accountant) when you start getting multiple entities involved and co-owning one another.

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Can I Insure Multiple LLC’s Under The Same General Liability Policy?

I have multiple rental properties I want to put on one insurance policy. Can I do that?

Answer

Ask your insurance agent about this one. I have talked with a couple of insurance agents and they typically do not due to the complexities of pricing such a policy, but other brokers may have policies to insure multiple entities on a single policy.

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Can I Start A Second LLC From The Same Home Office I Am Running The First LLC From?

I already have an LLC that I am running from a home based office, with myself listed as registered agent at same address. Can I start a second LLC and run it from the same address and home office and list myself as registered agent at my home address for the second LLC in the same way I did the first? Would this pose any problems?

Answer

Yes you can:

1. Have the same person as the registered agent for many LLCs (and corporations, too).

2. Have many LLCs sharing the same address.

One caveat is that if you want to keep liability separate for these multiple LLCs, be sure that you treat them as separate entities. That means that they each have their own bank accounts (obviously), if one entity owns a piece of equipment, the other entity doesn’t use it without paying a rental charge, don’t mix money between the two (don’t deposit a check made out to LLC A into LLC B’s bank account, for example).

It is not uncommon at all for many different companies to all use the same address as their registered agent address.

One notorious example is 1209 North Orange Street in Delaware. According to a New York Times article, there are more than 285,000 (yes, more than one quarter million!) companies “headquartered” at the nondescript, one story office building.

  285,000+ corporations and LLCs are headquartered at this single location in Delaware.

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Can I Use A P.O. Box As The Primary Address For My LLC?

Can I use a P.O. box as the primary address for my LLC? I am looking to incorporate in Pennsylvania.

Answer

Most states, including Pennsylvania, require a street address (not a PO Box) for the LLC’s registered agent / resident agent. There are services such as UPS Stores that give you a real street address, and you refer to your box # as “Suite 123”.

For all other purposes, a PO Box as your LLC’s business address is usually acceptable.

Business address and registered agent address are two different concepts. A business address is where your business is located, such as a storefront or office.

A registered agent address is typically either your business address, your attorney’s office, or a separate company that acts as your registered agent.

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Can One Member Also Manage The LLC To The Exclusion Of The Other Members?

I would like to set up an LLC where I also retain final decision making on all issues. Is this possible. If so, is it accomplished by designating myself as also the manager? Or do I simply set it up as a member run LLC but then clarify management issue in the operating agreement, or something else entirely?

Answer

How the LLC is managed day to day is determined by the operating agreement.

If you don’t have an operating agreement, then your state LLC statute determines how your LLC is run.

Therefore, it is crucial that you have a written operating agreement specifying and detailing how management decisions are made. Mere designation as manager might not be sufficient.

The most comprehensive and safest solution would be to form your LLC and prepare a limited liability company operating agreement.

Answer the questions asked of you in drafting the operating agreement.

The next step is to take the operating agreement created for you to a local lawyer who specializes in small business transactional matters and have him/her review it and make any needed corrections.

This will be FAR less expensive than having an attorney draft your operating agreement from scratch.

You get the best of both worlds–cost effective legal work from a document processing company, combined with the security of knowing an actual human lawyer has reviewed the document.

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How Do You Record Capital Contributions In An LLC?

Would it be sufficient to write “capital contribution” or “start up” on the memo line of your check from your personal account in terms of documentation or should you draw up a contract in terms of start cost and ongoing company expenses until you make a profit?

Answer

If this is a single member LLC, then you can probably get away with simply writing “capital contribution” on the check for startup money.

If you are a member of multi-member LLC, you need to have an operating agreement and make sure that it addresses what happens to your capital contribution to protect your rights vs. the rights of the other members in the LLC to a return of the capital contribution.

For example, say you make a $10,000 capital contribution to the LLC and you have 3 fellow members. You are all equal 25% owners.

Suppose the LLC makes a $20,000 profit in year 1.

How is that allocated?

Does each member get $5,000?

Do you get your $10,000 back first, and the remaining $10,000 is divided 4 ways? (eg. you get $12,500 and the other three each get $2,500).

Some other method?

In other words, while the memo line method would establish that the check to the company was a capital contribution (compared to, for example, payment for services or a loan to the company), it would not spell out the members’ rights to the capital contribution after the company earns profits and, one day, eventually dissolves.

How your capital contribution is treated is determined by your operating agreement.

If you don’t have a written operating agreement, and there are multiple members in your LLC….get one.

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Startup Capital For A Coffeehouse LLC

I’m attempting to start up a coffeehouse and want to maintain control of my venture, but don’t have the necessary capital saved up to begin operations. To make it simple, let’s say I have $5K saved, but need $50K to start up. If I raise the needed funds from various investors, is there a way to maintain single ownership? By default, if someone is willing to invest $10K into my venture, doesn’t that give them majority ownership? — Seth,Nevada

Response:
Not at all.

In fact, someone could lend you $10k and have zero ownership in the company–instead, they get a promissory note.

This is the essence of a loan.

Furthermore, ownership of the company is NOT necessarily proportional to capital invested. If these investors are passive investors, and you are actively running the business, it would make sense for you to have a greater ownership than just your proportion of capital.

I would first explore a setup where the investors are loaning you money, perhaps with a healthy interest rate and even a kicker based on profits.

There is no rule that says that you have to give up majority control in order to fund your business.

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Do I Need to Transfer a Business Vehicle’s Title to My LLC?

If we are changing from a standard business to an LLC do we need to change title to the LLC on a vehicle that has been previously depreciated out?

Answer

If you want the ownership of the vehicle changed from “a standard business” (I assume you mean a sole proprietorship or partnership), to your LLC, then you will need to change the title.

Right now, the vehicle title is probably in your personal name. Therefore, any liability associated with the vehicle (even if another person is driving it), is associated with you personally as the owner.

Because you want the vehicle’s liability to be contained within the new LLC, you will need to have it owned by the LLC. Which means, transferring the title.

Remember that the LLC is its own legal entity–like a person. If you want another person to own your vehicle, you need them to re-title it.

Same with your LLC.

In terms of the tax effects of re-titling, that’s to be discussed with a tax adviser. If it’s been fully depreciated, then there’s probably little impact (particularly if the vehicle has little or no market value).

As far as deducting on going vehicle expenses as business expenses, there are two method:

Method 1 is to keep track of all repairs, maintenance, gas, vehicle property taxes (if your state charges those), and depreciation on the vehicle and use that to calculate expenses.

Method 2 is to keep track of business mileage and multiply that by the IRS’ business mileage rate. For 2012, that number is 55.5 cents per mile.

You will also want the LLC to hold insurance for the vehicle.

Just as an aside, be sure you have adequate insurance for your vehicle, particularly under-insured motorist and un-insured motorist. With the economy bad, you wouldn’t believe how many uninsured people are driving. If one of them puts you in the hospital for a month, and you get a $100,000 medical bill and tens of thousands in lost income, you can recover from your own uninsured/underinsured policy.

I would recommend a minimum of 100/300 under and uninsured motorists coverage, with 250/500 being preferred. The difference in premiums is small compared to the risk.

The most likely way for a young or middle aged person to be disabled temporarily or permanently is through an auto accident. High UIM/UM insurance limits are critical to ensuring that an uninsured driver doesn’t ruin your financial health along with your physical health.

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What Is The Difference Between A Managing Member And Managing Manager?

What is the difference between a managing member and a manager in terms of
a) authority
b) taxation

What is the maximum number of managers/managing members can a LLC have?

Can the managing member/manager reside outside the US?

Thanks

Leena d.

Answer

A managing member is a member of an LLC who is able to make decisions for the LLC–sign contracts, etc.

A manager of an LLC is a non-member who has been chosen by the members to operate the LLC. Sort of like a CEO for a corporation–the shareholders hire the CEO to operate the business day to day.

A manager who is not a member is simply an employee, and is taxed like an employee receiving a paycheck. The LLC takes a deduction for the expense of the manager’s salary.

A managing member, on the other hand, is an owner as well, and is taxed as a member of the LLC however the LLC has chosen to be taxed (as a partnership, as a disregarded entity or as a corporation).

Yes, LLCs can have members who reside outside of the US (unlike an s-corporation, which cannot), and there is no legal limit on the number of members (again, s-corporations have limits on the number of members).

There are practical limits to the number of members, however, and if you get too many members (in the several hundreds), you can run into SEC regulations regarding investments.

But if you’re talking about a couple dozen members, or even 100, there is not a problem.

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Do I Need To File An Operating Agreement Within The State?

Do I need to file an operating agreement with the state? If you don’t have to file the operating agreement with the state, where should one keep it? In addition can you amend the articles of organization to add a founding member or is that what is covered in the operating agreement.

Answer

You didn’t tell me your state, and some of the answers depend on what state you’re in.

Whether you need to file your operating agreement with the state depends on which state you live in.

When you use an LLC formation company, they will let you know during the formation process what filings are necessary.

If your state does not require filing of operating agreements, you should keep it where ever you store important documents (safe deposit box, a file cabinet at home, in a pile of papers on the kitchen table….just kidding about the last one). Your LLC’s operating agreement spells out the rights of the members in the LLC in case of a dispute among the members, and important asset provision vs. creditors of the LLC and/or the members. It’s important to have an operating agreement, and preferably in writing (even if your state does not require it).

Also, some states require amending articles of organization to add new members, but with most you simply update your operating agreement.

Furthermore, many states require LLCs to file annual reports, and one of the pieces of information on an annual report is to identify all of the members. Therefore, you will update the state on the number and identity of the members, though that does NOT necessarily mean that the state is provided a copy of your LLC’s operating agreement.

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Can You Just Pay A Partner For Expenses And Not An Actual Compensation Fee?

Can you just pay a partner for expenses and not an actual compensation fee?
We have just started and have agreed that if we can withhold from paying ourselves for the rest of the year it would be a good way to get extra working capital for the business.

– Amie, Ohio

Answer

There is no requirement under the LLC statutes that you pay out profits to the members. Members can (and often do in practice), work without compensation in the start-up years of a new business. Often times, the members will even lend money to the LLC to get it started if they don’t have access to outside investors.

Remember, however, that as the LLC earns profits, those profits will be reported on the members’ tax returns, and generate tax liability, so the LLC might want to distribute at least enough of the profits to the members so that they can pay their taxes.

In most cases, brand new businesses lose money during the first year or two. In that situation, those losses can be taken as tax deductions by each member on that member’s personal tax return.

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For Privacy, If I Use A Resident Agent, When Do I Use Their Address Vs. My Own?

I have a question regarding Resident Agents and privacy.

I run a home based business and would like more privacy. If I were to hire a resident agent, do I use the resident agent address for other things, such as opening business bank accounts and applying for business credit cards or do I use my personal address? Or when I deal with customers or vendors that need to pay me and need my EIN number, am I supposed to use my resident agent address or my personal address?

Answer

The Resident Agent is for official business such as notices from the state, IRS, and lawsuits. It is also the address that will be publicly accessible to anyone on the internet through your state’s official website (usually the Secretary of State and the Corporations Division).

A registered agent is not a mail forwarding service (though some providers bundle mail forwarding with registered agent services together for your convenience).

When it comes to dealing with customers, to best protect your privacy, I would use a post office box or a private mailbox and/or mail forwarding service.

So, you would have your business address as a PO Box (all your bank statements, bills, payments from customers would be directed there–if you get a lot of mail that requires a street address, look into private mailbox services that provide street addresses), and use a registered agent service for your registered agent.

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Tax Question When Forming An LLC In Nevada W/ Husband & Wife As Members

If forming an LLC in Nevada w/ husband & wife as members if we elect sub s – can IRS decide to treat as a single member LLC because we are married?

– Jerry, Georgia

Answer

You can choose either method of taxation–partnership or disregarded entity.

Use IRS Form 8832 (opens to a PDF in a new window–turn off your pop-up blockers) to elect your tax classification for your limited liability company.

If you don’t elect a specific taxation method, the IRS can/will choose one for you. That’s why it’s important to decide which you want at the beginning and make your election in writing, via the proper form.

Note: Because Nevada is a community property state, the IRS permits a husband and wife LLC to be treated as a QJV- Qualified Joint Venture. This is not so in non-community property states–husband and wife LLCs are taxed as partnerships (or corporations), but not as disregarded entities.

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How To Give Shares To A Spouse

My husband has formed an LLC in which he is ‘sole owner’. He wants to give me ’49’ shares of the 100 shares. We live in Ohio. Can we do this ourselves or do we need an attorney? Is there papers we need to provide to someone or is just simply type up a doc saying he is granting me 49 shares?

– Wendy, Ohio

Answer

When it comes to money or the law, you should put everything in writing, even if the transactions are “between friends” or even spouses.

NO ORAL AGREEMENTS!

Excuse me for shouting, but I see people who are otherwise very sophisticated (like doctors), entering into transactions for hundreds of thousands of dollars with nothing more than a verbal agreement.

Then they complain when there is a dispute, and it costs a fortune in legal fees to untangle the “he said, she said” without the help of a written document.

Please don’t be one of those 🙂

These transactions don’t just affect you, they also affect creditors and governmental authorities–so even if you “trust” your friends, relatives, spouse, it needs to be in writing.

A simple written document (prepared by yourself) transferring shares would likely suffice.

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Using My Home Address As An LLC address

Using your home address for your LLC address, won’t that be a bit confusing in terms of your personal bills, utilities, even to your mail carrier, etc? Won’t that seem as if you’re already commingling your business with your personal life?

Secondly, could you further explain what is looked at as commingling your business funds with your personal funds. You stated you can pay yourself everyday from your LLC, how is that not viewed as commingling? Where is the line drawn?

Thanks for all your help!

– Jackie, Missouri

Answer

We have clients in the real estate business who have dozens of separate LLCs (usually one per property or group of properties), and they all use the same office address. It’s a very common practice.

As far as using your home address, that shouldn’t cause a commingling problem. Sure your company bills come to your home, as well as your personal utility bills–but, you’re not paying your personal utility bills with company checks, right?

In the new rental home I’m in, I sometimes get junk mail addressed to a home based business that the previous tenant ran. It never caused or causes a problem. Mail carriers are used to multiple people living at, and businesses receiving mail at, the same address.

Think about commingling this way, using a job as an example.

You receive a paycheck from your employer. It’s a check written on the employer’s bank account to you. You deposit the check in your bank account. From your bank account you pay all your personal bills.

Now, commingling would be if you took a couple of blank company checks from your employer and used them to pay your personal bills.

To avoid commingling, then, you simply need to only write the following kinds of checks from your LLC bank account:

1. Checks for the LLC’s business expenses;

2. Checks for profit distributions to the LLC’s members.

If you do that, then you are not commingling funds.

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How Does One Add A Member To An Existing Single-Member LLC?

How does one add a member to an existing single-member LLC? Can both members then be managing members? If necessary, how is this designated?

Answer

You add a member by updating your Operating Agreement to show the new member. Some states require that you update your Articles of Organization as well.

In addition to updating the Operating Agreement, there should also be some document showing what the member paid for his/her membership units in the LLC and how many units the new member acquired.

Any member can have the authority of a managing member. This would be designated in the updated Operating Agreement.

Question About Starting A Single Member LLC With Intent to Add Members Later

Question: Hi, I am looking to form an LLC and I’ll be the only member right now. Being a small startup, I’d like to know “best practices” of how this company should run now and how it should be run as soon as I have other members. Thank You!! — by New Yorker Girl, (NY)

Answer

The main things are:

1. Create your LLC as soon as possible–before you start entering contracts or selling to the public. If you haven’t created one before, I would suggest using a full-service online incorporation company such as Legalzoom or the Company Corporation.

2. Open bank accounts, credit cards, paypal accounts, etc. in your LLC’s name as soon as possible.

3. Invest in a good accounting software (such as Quickbooks).

4. Make sure you have a written operating agreement–particularly once you add another member to your LLC. (See answer above about mechanics of adding member).

5. Use a payroll service to pay your employees so your business does not get behind on paying withholding taxes.

6. If your business has employees, make sure to obtain worker’s compensation insurance.

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Married Couple LLC filing as a Disregarded Entity

The LLC was formed in 2004 with myself (75%) and my wife (25%). We have filed 2 returns in years 2004 – 2006: one joint personal return, one for the LLC taxed as a partnership. We have not filed for 2007 but need to by end of business on Monday. Can I elect a disregarded entity and file in one return. The LLC was formed in Delaware. We are residence and the business is located in Mass. If so, is there anything special I need to do given that we filed separate business and personal returns previously?

Answer

Use the following form to elect to have your LLC taxed as a disregarded entity (the only limited liability companies eligible for such treatment are single member LLCs and LLCs where the only two members are husband and wife):

http://www.irs.gov/pub/irs-pdf/f8832.pdf

Under IRS rules, you have to file the Form 8832 no later than 75 days after the date you want the new classification to take effect.

In your situation, it’s too late to elect disregarded entity status for 2007. However, you can file your Form 8832 to elect disregarded entity status going forward. Attach a copy of your Form 8832 to your partnership tax return when you file it.

QUESTION
is there any reason to continue to do the separate returns? Is there any other reason to do it besides the obvious administrative benefits?

Answer

If you are married, and file joint personal tax returns, I can’t think of any reason why your tax situation would change going from partnership taxation(where you and your spouse are the only members of the LLC), to disregarded entity status.

So yes, the advantage of disregarded entity status are the administrative benefits.

The only advantage to keeping it separate, and this is an “advanced” topic, is that as a disregarded entity, your income and expense statements are on your Schedule C, as opposed to a separate form 1065. Now, there are tax advisors who speculate that you are less likely to be audited if you file as a partnership using form 1065 rather than as a disregarded entity using Schedule C. The statistics do somewhat support that view.

That said, even the “increased” chance of audit using a Schedule C is about 2% (meaning, you have a 2% chance of being audited in any particular year).

With proper records and receipts, an audit should be nothing to fear. Furthermore, many audits are conducted through the mail, and do not involve an IRS agent physically rummaging through your desk drawers and files.

The administrative benefits of disregarded entity status accrue each year, while the chance of an audit is slim (you have a 98% chance each year of NOT being audited).

You make the call.


Return to Ask A Question About Single Member LLCs.

Members are Husband & Wife in a community property state

For tax purposes, can an LLC whose only members are husband and wife be treated as a single member llc in a community property state (CA)?

Answer

For income tax purposes, an LLC owned solely by husband and wife can be treated as a single member limited liability company. This includes election as a disregarded entity.

Whether the limited liability company is formed in a community property state is not relevant for this purpose–LLCs in all states can elect single member llc status if owned by a husband and wife who file their income taxes jointly.

Of course, being in a community property state will obviously have an impact on distribution of the LLC membership interests in the event of a dissolution of the marriage.

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LLC Adding Partners Or Selling Stock?

I am looking to start an LLC with one partner. We will have to hire a CEO soon, as I do marketing and he does programming.

Does an LLC allow you to offer shares to a new partner?

I do not want to start an LLC and then have to incorporate immediately.
Thanks

Answer

Yes, you can buy and sell membership interests in a limited liability company. These are generally equivalent to owning “shares” in a corporation. However, the Operating Agreement will specify particularly what powers a member has with respect to those shares and how taxes are allocated.

What that means is that you can write the rules for your LLC that makes membership units as easily transferable as in a corporation. On the other hand, you can tighten up the rules such that existing members have to approve new members, have the right of first refusal if a member wants to sell his/her units, prevent creditors that take membership units involuntarily from exercising decision making control, and so forth.

At a minimum, you will want written evidence that the shares were issued and money paid (or services rendered) in exchange for the membership units.

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What Are LLC Individual Members Rights?

Can a member be silenced by other members without reason?+

Petra, California

Answer

Member rights vary state to state, but as a general rule, members holding a minority interest in the LLC are protected from oppression by the majority.

Many states give members the right, for example, to inspect the company records (including financials).

As a minority member, you have rights granted to you by state law, and by your Operating Agreement.

You’ll need to speak with a California attorney and provide him with a copy of your Operating Agreement so he or she can determine your rights.

A helpful thing to do as well, when dealing with an attorney in litigation, is to write a chronological outline of the events in dispute.

This will act as a framework for your lawyer to interpret the mountain of documents that will soon arrive through the litigation process.

The advantage to you is that the less work your lawyer does figuring out what the heck went on (remember, yours is not her only case), the sooner she can address the legal issues and obtain a better result for you at a lower fee.

Don’t try to guess at the law in your narrative, just explain in order what happened, paying careful attention to the who, what, where, when, and how of the events.

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LLC Operating Without An Operating Agreement And Managing Member Controls Everything

I was told it is illegal in the State of Missouri to operate an LLC without an Operating Agreement. Please enlighten me. An Operating Agreement was never signed by the members. A “draft” was put together but that is where it stopped. To make a long story short, the members are blaming one member for all of the problems of the LLC, however this member is not the managing member of the LLC and has no control over anything.

Also, what can a member of a small LLC do when the managing member refuses to provide requested information such as financials and the member is attempting to sell their share but without information can not. The LLC operates at a loss and it is only at the end of the year when the LLC demands money from the members to pay such things as Taxes.

All members are equal partners – 1/3; 1/3; 1/3.

The LLC was set up to purchase and manage a commercial building.

– Dan, Missouri

Answer

If there is significant money at stake here (or potential liability), you need a lawyer.

As far as it being “illegal” to have an LLC without an operating agreement in Missouri, here is how the statute reads:

      § 347.081 RSMo. Operating agreement, contents — policy statement — enforceability, remedies
      1. The member or members of a limited liability company shall adopt an operating agreement containing such provisions as such member or members may deem appropriate, subject only to the provisions of sections 347.010 to 347.187 and other law.
      The operating agreement may contain any provision, not inconsistent with law, relating to the conduct of the business and affairs of the limited liability company, its rights and powers, and the rights, powers and duties of its members, managers, agents or employees, including…

So, Missouri law does say that an LLC “shall” adopt an operating agreement.

It doesn’t say it needs to be writing.

So, what kind of verbal agreement do the members have?

My guess is that each one has a different recollection of what they agreed to.

You see where this is going?

If there is significant money at stake, resolving this situation could involve large legal fees.

For everyone out there reading this, it is critical that you have a written operating agreement for your LLC.

This is a place where money spent on a lawyer–particularly if there is a lot of money in the company and multiple members–might be well spent.

In either case, the operating agreement is the first thing any lawyer will ask you when it comes time to resolve disputes among the members.

Without a written agreement, we are stuck with “he said, she said”, which are almost always more costly and risky to litigate then when you have written documents to rely on.

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Mailbox Forwarding

If I am operating a home based business and use a mailbox forwarding service, can I use that address as my business address and registered agent address (if I am sole proprietor) when I register my business with the state?

Would I have to use my home address first when I register and then use my mailbox forwarding service. I would prefer not to get all the solicitations to my home.

Answer

Your registered agent address must be a physical, street address. I’m not sure exactly how the mailbox forwarding company you’re using is setup, so it’s unclear if it would “count” as a physical, street address for the purposes of your registered agent.

The best way to avoid too much junk mail to your home address is to use the registered agent service offered by an llc creation service.

For a reasonable annual fee, they will act as your registered agent and keep your home address off the junk mail lists (which are compiled from the public records of new businesses formed).

When dealing with your customers and suppliers, you of course use your mail forwarding service address and NOT your registered agent address.

The registered agent address is only for the state’s purposes so you can be served summons and other legal papers.

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Maine (or other state) LLC versus Delaware LLC

I need to form a company that will maintain a home office (primary office) in my personal residence in Maine (1 of 2 physical offices, the other to be located abroad), conduct business and generate revenue solely outside of the US with the exception of management/consultant services provided from my home office (about 50% of company services). I do not wish to take the revenue of the company as personal income, rather to be paid a consulting fee or dividend from company income. Company revenue will payout some fees that will go to other consultants and the company will pay for office costs and any other business related expenses. I would be and remain sole owner of the LLC with survivorship rights for my heirs. Company profit will remain with the company and may be invested in various vehicles (stocks, bonds, etc) to provide further income for the company. Would it be more advantageous to form an LLC in Delaware or Maine? Delaware has no corporate taxes, but if formed in Delaware would I need to file as a foreign entity doing business in Maine noting the business circumstance described above, or does that circumstance actually constitute doing business in Maine by virtue of maintaining an office in my home there? Thank you for your consideration.

– Bob, Maine

Answer

Your Maine office will probably count as transacting business in Maine, so you’d have to qualify as a foreign entity, particularly if you have employees at the office.

Is the LLC going to be taxed as a corporation or as a partnership?

The reason I ask is that if the LLC will be taxed as a partnership, the fact that Delaware has no corporate state tax is irrelevant because the LLC will pay no entity-level taxes anyway.

Instead, state taxes will be determined by the citizenship of the individual member receiving profits from the LLC(in your case, your citizenship in Maine).

If the LLC is taxed as a corporation, then the corporation can avoid state taxation at the entity level by incorporating in a state without state income tax on corporations. However, if you pay a salary from the LLC, then you will pay state income tax on that salary. Same if you take a dividend from the LLC.

So you will not avoid all Maine state taxes even if you form your LLC in Delaware (though you will avoid some).

As always, check with a tax adviser and attorney–I’m just a guy on the internet and I don’t give legal or financial advice, just my opinions.

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Manager Managed, Single Member LLC

Is it possible to have a single member LLC, that is managed by a another individual, that has no ownership interest in the company?

If yes, what agreements would one need?

– John, California

Answer

You can create such an arrangement, and it is called, as you accurately guessed, a “Manager Managed Single Member LLC”.

The beauty of the limited liability company is that you have great flexibility in how your LLC is managed and owned.

Management and ownership of your LLC is controlled by the Operating Agreement.

Your Operating Agreement can specify pretty much any arrangement you and the other members agree on, from profit distribution, guaranteed payments, how taxes are passed through, and more.

If you use a service like Legalzoom to form your limited liability company, they will ask you questions regarding whether you would like the LLC to be member-managed or manager-managed.

Answer those questions accordingly.

All Legalzoom LLC packages come with a customized Operating Agreement. This Operating Agreement will be a good start for most people’s purposes. If you need further help, you should consult with a California attorney to make appropriate modifications.

It will be far less expensive to have your CA attorney modify an Operating Agreement from Legalzoom than to go to have the same attorney create an Operating Agreement from scratch.

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Need To Include Investors In My LLC?

Hello. Great website with a lot of information.

Here’s my scenario: I have not yet created my LLC yet. I am attempting to buy a small multifamily property – 16 units. For the down payment, I have 8 investors (mainly family members and close friends) that are each going to put up $10,000. I will pay them back with a lump sum including a nice interest rate. They could be silent partners but I do not wish to include them in the LLC. Do I need to? Should I set up a separate LLC just for them? What other legal form or documentation could be set up so that they are at ease with loaning me the money? Any advise is greatly appreciated.

– Rob, Texas

Answer

If you want them to actually own a percentage of the property, then they should be members of the “main” LLC. There is no need to create a separate LLC just for the investors.

On the other hand, if they are merely lenders, then you’ll need signed promissory notes by which the LLC agrees to repay the loans plus interest.

From your description of the business arrangement between you and your friends that you’re going to repay the principal plus interest, it sounds like this is a lender-borrower relationship and not a co-ownership situation.

Texas is a deed of trust state, so your lenders might insist on a deed of trust on the property to secure the promissory notes.

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Can We Have No Capital Accounts Based On Equal Membership Interests?

Hello,

Our LLC of three members would like to have equal ownership and membership control, regardless of capital contributions made by individuals. What one pays in belongs to all, so to speak. There are three members, and all decisions made must be unanimous, and ownership is based on the number of members, in this case each member owns one-third of the company, assets, debts, etc.

Based on that, we would like to craft an op agreement that does not require capital accounts and the associated tracking, only a statement that the members own they cut in based on 100% divided by the # of members, period.

Info:

We are based in CO.
We are an entertainment company that either publishes or sells publishing rights for various media – no physical goods.

Thanks!

J.S.

Answer

The members of an LLC can agree to essentially any distribution and ownership scheme they wish, including the one outlined above.

Of course, there might be tax consequences to the different members based on the allocations. Therefore, you should consult a tax attorney who specializes in partnership and closely held corporation tax.

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One LLC Owning Another LLC

Hello there,

My business partner and I are in the process of buying a business. We want to set up one LLC to actually be the purchasing party.This will be a single member LLC in the name of my partner only.
We would then like to set up a second LLC that will hopefully act as the parent company and will own all of the assets of the original LLC.

How will I proceed with this set up. Will I need to set up the parent company first or at the same time.

Thanks

Answer

Setup the LLC to be owned by your partner first and purchase the business.

Then, form the second LLC.

You will then transfer ownership of the first LLC to the second LLC by having the second LLC purchase your partner’s membership interest (aka shares) of the first.

Now you will have LLC-1 whose membership interest is entirely owned by LLC-2. LLC-2’s membership interest will be owned by you and your partner in whatever proportions you decide.

You will need to memorialize these transfers in writing with appropriate legal documents.

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Registered Agent Questions

hi,
I wish to be the registered agent to my llc company in Virginia.

What is the form do I need to fill in and submit to VA state corporation commission ?

Do I need to mail this to
Clerk of the State Corporation Commission
P.O. Box 1197
Richmond, Virginia 23218-1197

Thanks

Answer

Assuming that you have already formed your Virginia LLC, you can request a change of registered agent form here:

http://www.scc.virginia.gov/clk/ElectronicFormRequest.aspx

If you have not formed your Virginia LLC yet, then you will name your registered agent on line 4 of your Articles of Organization, which you can download in .PDF format below:

Virginia Articles of Organization.

For those with LLC’s outside of Virginia, the same situation applies.

If you have not already filed your Articles of Organization, then that is where you will select your registered agent.

If you already have filed, most states have a form you can file to change/update your registered agent address.

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Sale of LLC Member Interests

What if I decide later to sell 50% of my SMLLC. Would it be sold as a member interest? If not, what would I be selling exactly? Or, can I even bring in a “partner” in this structure since the name itself indicates a single member?

Answer

An LLC with one member is a “single member LLC”. By selling half your member interest to another person, the LLC is now a multi-member LLC. A membership interest in an LLC is an asset which can be sold just like stock in a c-corporation.

Check with your accountant to determine the tax implications of selling an LLC membership interest–you might show either a gain or loss on the sale of that interest (just like you would selling stock in a corporation). Depending on how long you held that interest before selling it, the sale could be classified as either a long term or short term capital gain.

After the sale, while the LLC would no longer technically be a single-member LLC, you would not have to refile your Articles of Organization or anything like that.  Most states do require annual reports from all LLCs, and some of those reports include listing all members of the LLC.

The only change you might have to make is if the LLC was previously filing its taxes as a disregarded entity, the LLC would now have to file a an annual partnership tax return (Form 1065) and issue K-1s to each member. The pass-through taxation would remain the same (unless you specifically elect otherwise and file the appropriate tax forms).

Finally, when your company takes on a new member for the first time, you should review the LLC’s operating agreement carefully. Oftentimes, an LLC that starts out as a single member will have a simplified operating agreement.

Once additional members are present, your operating agreement should reflect the issues that having additional members causes.

For example, if a member wants to sell their interest, do the other members get right of first refusal to purchase the shares before an outsider does?

How are profits divided? Do you take into account the fact that the founding member invested money in the LLC before the new member joined?

Just a few things to think over in putting together your deal.

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Does A Spouse Have To Be Listed As A LLC Member For Liability Protection?

If an LLC protects a person’s personal assets from liability does a spouse have to be listed as a member to also be protected even if not involved in the business? Or can just the spouse running the business be listed?

– Carrie, Minnesota

Answer

A limited liability does not “protect” your personal assets by virtue of you being listed as a member. The LLC protects you because it isn’t you–its debts are its own.

Just as you are not responsible for your neighbor’s debts or my debts, you are not responsible for an LLC’s debts.

Think of a member of an LLC as a shareholder in a company. If I’m a shareholder in Microsoft, I’m not responsible for Microsoft’s debts. If I’m not a shareholder in Microsoft, I’m still not responsible for its debts. The reason I’m a shareholder is because I own a piece of the company and share in its profits.

Therefore, if you want your spouse to own part of the limited liability company, then she/he should be a member. If not, then they should not be a member.

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Transfering An LLC From Connecticut to Florida

I currently have an llc in the state of CT, and I will be moving to Florida shortly. I would like to know if the llc can be transferred and how much it will cost.

Answer

I’m assuming that the CT llc’s business will be operated in Florida once you move.

If the business is not being operated in the new state (for example, the CT LLC owns a piece of real estate in CT that obviously will remain in CT after you move) then you need to change nothing. There is nothing preventing a Florida resident from owning stock in a CT LLC or corporation.

On the other hand, if the LLC is actually going to be operating in Florida, then you’ll need to get the CT LLC qualified as a “foreign corporation” in Florida. So you wouldn’t be transferring from Connecticut to Florida so much as becoming a Florida AND Connecticut LLC.

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Transferring Single Member LLC To Another Person

My LLC is a single member LLC- 100% ownership is mine. I would like to transfer complete ownership to someone else (relative). Can I just make a transfer document and do it or do I have to redraft the operating agreement?

What other requirements are there for transfer?

Answer

You’re going to need to do the following:

1. Assign your interest in the LLC to the buyer.

2. Amend the Operating Agreement to add the buyer as a member and remove the seller as a member.

3. Amend the Articles of Organization with the state (only some states require this, for example, Arizona does).

4. Draft a resolution of the members of the LLC approving the sale of the interest.

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Is There A Danger Of Using My Home Address As The Registered Agent?

When forming an LLC my home address was used as there was no office space as yet to list. Will this compromise the LLC and enable anyone to claim against the home address in case of loss?

Answer

The short answer is no.

The use of a home address alone for your registered agent address will not cause your corporate veil to be pierced.

Piercing the corporate veil is an extreme remedy, and it usually takes multiple factors–including fraud by the owners/officers of the entity–to cause a court to pierce the veil.

The biggest disadvantage to listing your home address is that you will now get a ton of junk mail to your home, because your LLC filing is public knowledge and marketers can purchase list of newly formed companies.

Every state has a website where any person can search the name of a corporation or limited liability company and see, at minimum, the registered agent address. Some states further require annual filings listing the officers of a corporation, and that information is also public.

But at minimum, your registered agent address is always publicly visible. Furthermore, most states let anyone view the change history to an LLC’s registered or resident agent. If you want to keep your connection to an LLC private for some reason, then you should use an outside provider as your registered agent and not your home address.

Also, if your company is ever sued, the summons will be served at your home, which might cause embarrassment.

For example, I had a client who was sued in federal court by an out-of-state bank on a defaulted business loan, and the bank decided to have the US Marshall serve the summons instead of using a private process server. The client was obviously upset, scared and embarrassed as her neighbors saw federal agents in marked vehicles outside her home and in this world, people are likely to think she did something criminal rather than a mere lawsuit on a business loan.

You can always change your registered agent to one of the many registered agent services available in every state, such as Legal Zoom’s. They usually charge anywhere from $75-$200 per year, depending on the level of services provided and who you choose to use.

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Visitors Questions Answered About Texas LLC

Do members of LLC had to added to LLC at the time of filing or operating agreement is enough to show the ownership of a given member.

We are 10 friends who are trying to form a LLC and question is whether a manager is good enough or all of the members should be added to reflect the ownership in the company.

Regards…Abinder

Answer

The Articles of Organization do not control who can ultimately become a member of your LLC. As long as your Operating Agreement permits it, members can transfer their shares in the LLC among themselves or sell to outside parties to bring more investors into the company.

You will obviously want some writing documenting each member’s ownership and transfers of ownership, which can be done through an amendment or exhibit to your operating agreement.

Some states require that the LLC file reports showing the identity of the current members.

Non-residents can start an LLC in Texas?

by Julio de Melo
(Brazil)

Hi,
I would like to know if a non-resident (a person from another country with no green card or permanent visa) can start a company in Texas (or any other state, for that matter).
Thanks!

Answer

Non-residents can form LLCs in the US, including in Texas.

However, s-corporations (which includes LLCs that choose to be taxed as s-corporations) cannot have any non-citizen as a shareholder.

Is LLC best way to go?

by Gayla
(Texas)

Is an LLC the best way to go for elderly household and education services business or should I go with an S-Corporation or even try for a nonprofit corporation (if we drop the household services and just go with education)?

Answer

A non-profit will have more hoops to jump through than a for-profit LLC or s-corporation. Does your business actually qualify as a non-profit?

As to LLC vs. S-corporation, each has its disadvantages and advantages. There are ways to somewhat lessen self-employment taxes with an S-corporation, though you do not eliminate them entirely–and it comes at the cost of having the IRS second-guess what a “reasonable” wage is to pay yourself.

In addition, there are restrictions on the type of shareholders in an S-corporation (only natural persons who are US citizens), and you cannot have multiple classes of ownership in an S-corporation.

An LLC is extremely flexible, and can, in fact, be taxed as an S-corporation (however, the LLC must comply with all S-corporation rules in order to maintain S-corporation tax status).

Therefore, you need to consider your goals and requirements to determine the best entity for your needs.

Removing myself from an LLC in texas

Hi, I’m part of an LLC in Texas and I want to remove myself. There are 4 members including me. There is no operating agreement outlining how to do this. Everyone is in agreement and the other members want to continue operation of the LLC. how can I remove myself? What forms do I need? and what forms need to be filled in order for the other members of the LLC to continue on?
Thanks!

Answer

You want to withdraw from the LLC.

Unfortunately, Texas law prohibits a member from withdrawing from an LLC (§ 101.107).

However, your written operating agreement can override this prohibition (along with most others, see § 101.052), and permit withdrawal.

Because your LLC does not have a written operating agreement, you cannot withdraw until you have one.

My suggestion would be to draw up a written operating agreement permitting you to withdraw, and have all the members sign it.

Houston, Tx.

by Roger V.
(Houston, Tx., Harris Co.)

can you file for llc in Houston, Tx.? If so, how much is it?

Answer

Forming an LLC is done by state, not by city. So, forming a Texas LLC will be the same cost in Houston as anywhere else in Texas.

As of October, 2009, Texas charges $300 to form an LLC. This is the state fee, and does not include the fees of using a service such as Legalzoom to file the Articles of Organization and other formation documents.

Naive Question

by Mohsen
(Dallas)

Greetings,

I would consider myself a business professional but am somewhat new to the concept of founding my own business which is what I am currently considering. My question is, can I establish my business, run it initially for a limited period of time, before incorporating? this would be in an effort to assess the viability and likelihood of success before investing substantial sums of cash into the incorporation.

Answer

Yes, you can run your business before incorporating.

However, understand that you can be held personally liable for pre-incorporation activities, contracts, etc.

You have to balance the risk and reward according to your own tastes/preferences.

Depending on the type of business you’re running, incorporation expenses could be a large percentage of startup costs.

On the other hand, if you are starting up a business where you’re planning on spending tens or hundreds of thousands getting up and running (such as a franchise), you really ought to incorporate from the beginning.

Quarterly Taxes

I am a brand new SMLLC in Houston, Tx where i work and live, and i am wondering if i have to do a 1040ES next year. I just started so I don’t have anything to go off of.

Answer

You do your 1040ES based on last year’s 1040.

Remember, your 1040ES is based off your personal income tax return.

Your 1040 is the “home base” for all your taxes. The profit and loss from your single member LLC “flows through” to your 1040, and either increases your taxable income (if you made a profit), or decreases it (if you show a loss).

So, if you were employed at a job last year, and made a salary of $X and reported it on your 1040, use those numbers for your 1040ES this year.

Your single member LLC is just another source of potential income for next year (similar to if you planned on taking on a second job next year).

Assuming you pay the minimum amount based on last year’s income, you will not be subject to penalties, if, for example, you make a whole bunch of money next year.

You will of course, have to make up all the difference the following April 15…but you won’t be hit with additional penalties for not making the required estimated payments.

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We Have A Sub-S Corp And A DBA Each With It’s Own FEIN #

We have a sub-s corp and a dba, each with it’s own Fein#. We file one tax return under the sub-s corp name which includes all the activities of the dba. Since we do almost all of our business under the name of the s-corp should we drop the dba fein number or put the dba under the umbrella of the s-corp?

– Carl, Illinois

Answer

I’m not sure why the DBA has a separate FEIN.

The purpose of a DBA is to do business under another name, but without creating a separate legal entity.

DBAs are often used by sole proprietors to operate their business with a trade name rather than their own name. You can also file a DBA to use a trade name for your business other than the legal entity name.

For example, say you had an entity called XYZ Enterprises, Inc. (taxed as an s-corp). The name of your entity doesn’t really describe your business, so you file a DBA to use the name XYZ Lawncare.  XYZ Lawncare wouldn’t have a separate FEIN from XYZ Enterprises, Inc. The DBA allows you to publicly use a more identifiable and brandable name for your business than the name of the legal entity.

I would ask whomever set you up with a DBA under the s-corp why you did so, and if there is no longer a compelling reason for it, I’d stop using it.

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We Have An LLC With 1 EIN And Want To Create A Sister Company

Do we need to create a new corporation? Do we need to create a new ein?

we file as an s- corp and want to gain the benefit overall of the new company that will generate at a loss for a few years.

– Jennifer, Texas

Answer

When you say a “sister corporation”, do you mean that you want an entity that is legally separate from the one you currently have?

In other words, do you want to prevent the liabilities of one company from ‘flowing’ into the other?

If so, and if you want to keep the two companies separate in terms of liabilities, then you’ll need to form separate legal entities, which means forming a new LLC with its own name, EIN, etc.

Otherwise, just have this new “business” operate within your existing LLC.

I notice you anticipate the new business incurring a loss during the startup period.

Here, you’ll want to avoid the c-corporation and stick to partnership or single member LLC (disregarded entity) status to flow those losses through to your personal income tax return and take the deduction.

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What Address Do I Use With An LLC For An Internet Business?

I’m leaning towards creating an LLC and was wondering if I need to use my home address as the LLCs address or can I use a different address like a PO Box from a UPS Store?

Also I plan on naming my LLC different from my 3 websites. I want them to be covered under my LLC, so would I need to file “Doing Business As” – DBAs for each website? And is that done at the secretary of state?

Also since I will be the owner, single member is it necessary to get an EIN? or can I just use my Social Security Number?

– Joe, Michigan

Answer

1. You can use your home address for your LLC’s business address and registered agent address. Understand that the registered agent address is public knowledge. This may or may not be a concern to use. Using an outside service will give you more privacy, but it costs more money.

You cannot use a PO Box as a registered agent address.

2. You don’t need a DBA for each domain name. Make sure that the LLC is listed as the owner of the site, that the LLC pays for the hosting, etc., and that the LLC registers for copyright for the site. In other words, you want it to be clear that the LLC is owner of all the sites. That includes having the LLC open an Adsense account in its own name (if you use Adsense); any affiliate accounts in its own name, Paypal accounts and so on.

3. A separate EIN is a good idea even for single member LLCs, even if not necessarily required because you don’t have employees.

There is no cost to obtain an EIN if you do it yourself by filing a Form SS-4 (you can even fax it or do it over the phone). You’ll be using your EIN to apply for wholesale accounts, paypal, bank accounts, affiliate accounts, etc., and using the EIN instead of your Social Security name gives you a little more privacy.

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What Is The Difference Between Members Vs Managers

When choosing who should run my llc members or managers what are the differences?

Answer

A member is the owner of the LLC. Think of them like shareholders in a corporation.

A “manager” is a person who has the power to make decisions on behalf of the LLC.

In a member-managed LLC, the members (owners), make all the decisions. It’s sort of like running a partnership.

In a manager-managed LLC, a manager (who is not an owner/member), is hired by the owner(s) to manage the day to day operations of the company.

Before the IRS changed the rules to allow LLCs to simply choose whether to be taxed as partnerships or corporations (called “check the box” regulations), whether an LLC was manager or member-managed could impact its tax classification. There was a four part test to determine if the LLC was more like a corporation or a partnership.

This is not an issue anymore, which is good because the old system was complex and confusing.

If the members (owners) of the LLC are going to operate the LLC on a daily basis, the LLC should be member-managed.

If the members are hiring some non-owner to manage the company, then it is a manager-managed LLC and they need to appoint that person as Manager.

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