We are going to continue our look at the different types of business entities in New Jersey byu looking at limited liability corporations (LL). And what is an LLC? It is a separate and distinct entity where the owners, known as members, have limited liability for the company. LLCs must file an EIN which is an employer identification number with the IRS. You can think about this as the LLC’s Social Security number. And LLCs are governed by operating agreements which is essentially contract between the members about the rights and responsibilities of the members and the company and what the company was established for.
What are the benefits of an LLC?
So what are some of the benefits of an LLC? Well, it offers personal asset protection for its members. So if a business gets sued only the business assets will be available should the party that is suing the business succeeds – which is very nice if you are a member of the LLC or the owner of an LLC. They are relatively easy to form. They are governed by operating agreements which is good because it lays out the rights and responsibilities of the members and should there be a dispute you’ll have a document to help you resolve that dispute in an efficient manner.
LLCs are allowed to exists in perpetuity, Now I know that sounds kind of silly, but up until 2013 when New Jersey modified the Uniform Limited Liability Companies Act, an LLC actually had to state that in its certificate of formation. LLCs no longer need to do this, though they must check the box on New Jersey’s website.
Pass through entity for tax purposes. The entity is not taxed, only members of the entity are taxed which avoids double taxation.
The LLC can have a bank account, which I know sounds kind of silly. But this is a benefits because if you have multiple members you don’t have to worry about commingling of funds. It also creates an additional latyer of protection for the members should any issues arise.
There is no limit on the number of members of an LLC. If you wanted to have a million peope be member of the LLC, you could do that. If you wanted to have one member you could do that and it is known as a single-member LLC.
It’s easy to hire employees, so as you expand your workforce can expand with you. Also, you can create units, parts of the LLC, as you see fit. So one unit could be worth 20% and have voting right, and another could be worth 1% and have no voting rights.
The Drawbacks of an LLC
LLCs are still a relatively new business [form] so the laws are still changing. Case in point, in March 2013 the New Jersey legislature adopted the Uniform Limited Liability Companies Act and reformed the laws governing LLCS.
You must file an annual report with the state of New Jersey. That doesn’t mean you have to give them a 10 page document about what’s going on, but you need to pay your fee, tell them you’re still around, and let them know what you are doing. And under some circumstances members can be found liable for the actions of the company, but that’s typically where fraud is involved where the outsider looking in would have difficulty distinguishing between the actions of the member and the actions of the LLC.
That concludes our overview of the LLC. In the next part we will take a look at corporations.