A Complete Guide to Limited Liability Company (LLC)
Congratulations, you’ve incorporated your very own Limited Liability Company (LLC). Running your LLC, unlike a traditional business, has various benefits that give you limited liability for business debts. However, unlike a traditional corporation, the LLC gives you additional benefits to skip a number of the legal hurdles and tax rules. For small and medium business, this is one of the most versatile and economical ways to structure their business and focus on what is really important, running the day-to-day business.
To get your LLC up and running, you have to complete some essential start-up tasks like registering with the Companies House (CH). CH is the regulatory body that registers all limited liability companies in the UK and maintains the registry of companies. It is legally mandated to register your company with Companies House before you start any business as a limited liability company. Registering a new company is a fairly simple process. This can either be done on your own, through an accountant, or through a company formations agent.
Documents Required At The Time Of Registration:
- Memorandum of Association
- Articles of Association
- Form IN01
We will discuss each of these documents in more details later in the article.
Furthermore, to be on the safe side of the law there are a few other technicalities that need to be kept in mind. In addition, there are a few new formalities and paperwork requirements that are required to be maintained to keep proper records of important LLC decision, transactions and meetings. This will protect you LLC status and keep members, directors and others appraised of the LLC’s activities.
There are three key aspects of and LLC
- Holding and documenting LLC directors’ and members’ meetings.
- Documenting actions taken by directors and members without having met.
- Approving common ongoing LLC legal, tax and business decisions.
Important Documentation to Record
Its imperative to keep a record of the following business resolutions:
- The minutes of yearly meetings of directors and/or members.
- The inclusion of new members into the LLC.
- Any purchase of property.
- Approval of a substantial loan or line of credit.
- Any changes to board members or elections.
- The buyback of an existing membership interest by the LLC.
LLC Formation Documentation Formalities
1. Articles of Association
The document that formally creates an LLC is its article of association. An LLC comes into existence when its articles or organisation are filed with the state LLC filing office. The articles usually contain fundamental structural information about the company, like:
- The name of the LLC
- The name of at least one Director
- Whether the LLC is managed by all its members or by specially selected directors.
- The names and addresses of its members and/or members and its registered agent.
- The agent’s office address or the registered office of the LLC where all office documentation can send legal papers to the LLC.
2. Operating Agreement
The operating agreement is an LLC’s second most important document. You don’t have to file the operating agreement with the government, its an internal document, juts like corporate bylaws or a partnership agreement.
The operating agreement lists the capital, profits and voting interests of current LLC members, and may include other operating rules for your business. For example, the operating agreement may specify how often regular meetings of directors and members will be held and the call, notice, quorum and voting rules for each type of meeting. Or it may not deal with these issues, leaving these details to the LLC directors and members to decide later. Typically, the operating agreement also includes rule and procedures for approving special matters, such as directors and member voting requirements for admitting new members or for approving the sale of a membership interest.
3. Memorandum of Association
Your LLC is not legally required to issues membership certificates to members. However, some LLC owners like this additional formality.
If you wish to issue certificates, there is not required format. Most certificates include the name of the LLC, the names of the member, and the date the certificate was issues. Certificates are signed by one or more LLC officers. A certificate usually does not show the exact capital, profits or voting interest of the member; instead, it simply recites that the member is entitled to the rights and subject to the responsibilities of membership, as set out in the articles of organisation and operating agreement of the LLC. After the certificate is issues to a member, the LLC’s secretary should fill out the certificate stub, listing the certificate number and date it was issued. These stubs should be kept in the LLC records folder. The stubs usually include a transfer section, to be filled in if the member transfers the membership back to the LLC or to another person.
4. Membership Register
It is mandated by law that all LLCs keep an alphabetical list of the names of addresses of all current members. This list should be available for inspection by members during regular business hours of the LLC. It should also be made available to all members at any membership meeting. The LLC secretary will use this list to prepare and mail notice of meetings to members. If the LLC is managed by specially selected directors, the LLC should also have a separate list of the directors’ names and addresses.
5. Membership Transfer Ledger
You should keep a record of the date and details of any transfers of membership in your LLC. Typically, a membership transfer ledger shows.
- The name of the transferring members
- The date of the transfer of membership
- The name of the transferee
If the transferring member was originally issues a membership certificate, the certificate should be returned to the LLC, marked “cancelled” by the LL secretary and attached to the transfer ledger. If your LLC issues membership certificates with stubs that contain a transfer section for supplying transfer information, the retained certificate stubs can serve as your membership transfer ledger.
Specific Laws Governing LLC
There are specific laws governing the operation of LLCs. These state laws regulate special areas of LLC activity.
These laws establish each state’s rules and procedures for offering, issuing, or selling securities. In many states, LLC membership interest are considered securities, just like stock interests in a corporation or ownership interests in limited partnerships. Therefore, they must be registered with the state, or, must qualify for a state exemption from registration, before being issued to members. Many states offer streamlined procedures for smaller businesses issuing shares to a limited number of people.
Tax laws regulate the taxation of business profits. In most cases, LLC profits pass through to the members and are reported on their individual income tax return. In some cases, LLCs must pay a separate entity-level income of franchise tax like a corporation.
Commercial laws include drafting various LLC agreements and contain rules for entering into and enforcing employment contracts, promissory notes and other standard commercial documents.
Other Laws as Prescribed
Various laws may affect the daily activities and operations of an LCC or otherwise operated as a traditional business. For example, you will have to follow building codes, professional licensing laws, or other local laws as you go about your daily business.
Advantages of an LLC
The biggest benefit of a limited liability company is the limited economic liability that business owner and shareholders must bear. If the company ever goes through monetary troubles, apart from actual value of their shareholding, the assets and personal finances of shareholders remain intact. Which means that if a company ever faces bankruptcy; the business owners are liable to owe a minimal value of their overall stake in the company. In some cases, this could be as little as £1.
There are more opportunities and great flexibility for taxes on profits and on personal income in the case of limited liability companies. Before 1 April 2015, LLCs had two Corporation tax rates;
- If their profits were £300,000 or above, then the corporation tax applicable was 20%.
- If the profits were £1,500,000 then the corporation tax applicable was 21%.
However, after revisions to this tax code on 1 April 2015, the tax rates have been brought down to 20%, regardless of the size of profit.
In addition, according to corporate tax laws, directors can keep their income level below the higher taxable level by taking remuneration in combination of dividends and salary. As a result, more money is available for reinvestment or distribution among the shareholders and directors.
A professional and corporate image is created by a limited company, thus boosting the value of business. The LLC generally follow a standard structure that the international business community is familiar with. This organisational structure is one that the international business community trusts. For instance, the structure includes the board of directors, secretaries and shareholders who manage the day-to-day operations of the company.
Operating an LLC without a doubt has certain disadvantages; considering the higher administration costs and accounting requirements, in addition to more attention and time that needs to be put in. Nevertheless, the professional and financial gains that outcome in the long run, outweigh these negatives.
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