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LLC Basics
The first LLC statute in the US was passed in the state of Wyoming in 1976. Nevada passed one in 1991, California in 1995, and the last state joined the fold in 1997. LLCs have their share of problems. The biggest problem that they currently face is the fact that they are so new. Because of this, there is simply a lack of case law to determine how LLCs will be treated in certain instances.
An LLC operates with the ease of a partnership and at the same time enjoys the protection of a “corporate veil”.
You do not have to live in New Mexico or Missouri to own or manage a New Mexico or Missouri LLC.
A New Mexico or Missouri LLC can have bank accounts in any state.
OWNERSHIP AND MANAGEMENT OPTIONS
An LLC is Member owned. Members can be people or entities such as another LLC, a Corporation, Corporation Sole.
The Member appoints the Manager who is in total control and makes most all decisions on behalf of the LLC, opens bank accounts, engages in contracts, etc.
When it comes to forming an LLC, there are two options for structuring the management of the LLC: “Member-managed” or “manager-managed.” Manager-Managed seems to be the popular option and offers the greatest amount of flexibility. A manager-managed LLC is one with a manager or managers who are designated to manage the business. In a Manager-managed LLC, the Manager does not have to be a Member. Non-managing Members/Owners do not share in the decision making process of the management of the LLC. Only appointed managers vote on management decisions and act as agents of the LLC In a manager-managed LLC.
Members/Owners of LLC’s who are active participants in the management of their business often form an LLC that is member-managed. In a member-managed LLC, managerial control and binding authority is vested in all of the members (owners) of the LLC. A member-managed LLC is similar to a sole proprietorship or partnership where the owners manage the affairs of the company.
WHY NEW MEXICO OR MISSOURI
A few words can sum it up, anonymity and cost-effectiveness.
New Mexico and Missouri offer a great amount of anonymity. These states do not require the names of the Members/Owners or Managers, so your name does not show up in the public record.
It is not necessary to live in New Mexico or Missouri to set up a Limited Liability Company in either state. The laws in all states require that limited liability companies have a Registered Agent in that state that can receive “service of process” on behalf of the company. The mailing address of the principal office can be anywhere in the world.
Both the New Mexico and Missouri Limited Liability Company are cost effective. Currently, there are no annual fees and filings. This is significant when compared to states like California that charge a minimum $800 annual franchise tax!
These LLCs are most powerful when used as a “holding” company for assets, bank accounts, and other business interests.
THE OPERATING AGREEMENT
The Operating Agreement is the guide by which the LLC is operated, and in various legal instances, may be scrutinized by the courts. A proper Operating Agreement can provide good protection against legal intervention in certain instances.
The operating agreement outlines the government of the company, the managers / members, the division of profits, and the members’ rights. The operating agreement also specifies the duties and responsibilities of the company’s members, managers, and officers. While the Articles of Organization are usually very brief, the operating agreement is usually much more detailed.
SINGLE MEMBER VS. MULTIPLE MEMBER LLCs AND THE IRS
An LLC is considered to be a “pass-through” entity, meaning the profit and loss passes through to the members (owners) unless you choose to be taxed as a corporation).
By default, a domestic single member LLC is categorized by the IRS as what they call a “disregarded” entity. This LLC may have no IRS reporting responsibility with the exception of certain excise tax returns and employment tax returns. Refer to 2009 Instructions for SS-4 at www.irs.gov (as always, consult your tax professional whenever appropriate). Instead, the responsibility passes through to the members (owners).
Single-Owner LLCs – Unless the owner of the company specifically elects to do otherwise, the IRS will automatically classify a single-owner LLC as a sole proprietor. The owner of the LLC reports the company’s profits or losses on Schedule C of their personal tax return (usually Form 1040).
If another LLC is the single Member/Owner, you will need to find and determine an appropriate, available reporting form and instructions from the IRS. See http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Single-Member-Limited-Liability-Companies.
Multiple-Owner LLCs – Similarly, unless they elect to do otherwise, LLCs with multiple owners (i.e. multiple members) are automatically taxed as partnerships at the federal level. Though the LLC itself does not pay taxes to the IRS, it does file Form 1065 “U.S. Partnership Return of Income” and issues each owner a Schedule K-1 that reports each owner’s individual share of profits or losses. Owners then file their personal tax returns (usually Form 1040) and report their income or loss from the LLC (Schedule E).
PROTECTING AGAINST LIABILITY
The members of a limited-liability company are not normally liable for the company’s obligations, but there can be exceptions if the LLC is not properly operated.
Please pay particular attention to this next point. If you are under the impression that no records need be kept, then carefully consider the following. Technically, New Mexico and Missouri statute may not require meetings, minutes, certain records, etc. However, if you are sued, there is this little thing called “an alter ego”. You may already be familiar with this term or perhaps you’ve heard it mentioned. It can make or break the LLC.
The “Alter Ego” Rule — if it is deemed to be nothing more than the “alter ego”, in other words, a mere shadow of yourself or its members, a limited-liability company will be ignored by the courts.
The “alter ego” argument used by creditors (whether businesses or individuals) that are owed money by the company, include bills the company itself is unable to pay. Such creditors want the LLC to be ignored so that they can seek payment from the LLC’s Members. Creditors can be successful in having the LLC disregarded as a legal entity if the legal formalities are not carefully observed, if personal and company assets are commingled, if personal obligations are paid for out of company funds, if company assets are used for personal use without payment or without being treated as part of an employee’s compensation or benefits, and/or if company financial records are not properly kept.
The “alter ego” theory may not be applied to an LLC that keeps accurate records of its meetings of managers and members, that keeps its financial affairs completely separate from those of its members, that has its financial records regularly maintained or at least reviewed by a certified public accountant, and that makes sure that all business is conducted in the company’s name.
If the entity were ever called into question in a court of law, you would want the court to see a properly operated entity that is not simply a shadow of yourself. By doing so you can help prevent piercing the corporate veil thus protecting the loss of everything.
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