<< Return to Articles Index
Forming an LLC:
Points to Consider
September 2009 — Are you thinking of starting a Limited Liability Company (LLC) in the District of Columbia? Perhaps you've heard that an LLC is a simpler choice of entity to create and operate than a corporation. It is true that an LLC can be created very easily by filing a notice (Articles of Organization) with the Mayor. It is also true that an LLC, like a corporation, provides limited liability but without the need to follow corporate formalities like having a board of directors or issuing stock. And an LLC does not face "double taxation" like a C corporation - at least not at the federal level. Some additional items you may want to consider before deciding whether an LLC is the right choice for you include:
- The District of Columbia treats LLCs as taxable entities. At the District level, therefore, the elimination of "double taxation" does not apply to LLCs.
- If you would be a one-person LLC, consider whether it might be preferable to be an S corporation. S corporations are taxed the same way as LLCs (pass-through taxation at the federal level) and also provide limited liability. In addition, as an S corporation, you might save on self-employment taxes, although you would have the attendant administrative burden of paying payroll taxes. Note that the District of Columbia does not recognize the "S" form of corporation and that all corporations are subject to DC corporate taxes.
- If your LLC will have more than one member, your Operating Agreement will be the foundation for effectively managing your company. Your Operating Agreement, which is a contract among the members of the LLC, should be a carefully considered document governing the relationship of the members and the management of the LLC. You will have to think through many issues relating to management, profits, distributions, and the resolution of potential future problems. By contrast, you can avoid spending the time to create an Operating Agreement if you become a corporation, because DC code lays out many of the rights and duties of the parties.
- If you form a "close corporation" - one that has 35 or fewer shareholders and restrictions on the transfer of shares - DC code permits a more informal management style governed by a shareholders' agreement. When such a close corporation is managed by its shareholders, a board of directors does not need to be elected.
- Your financing plans will affect your choice of entity. If you are planning to raise venture capital, or to go public after your company has grown, you generally need to be a C corporation.
For more information regarding business formation, please contact our offices.
This information is not intended to constitute, and should not be considered, legal advice. This article is provided as general information that may or may not reflect the most current legal developments.
|
