One of the most common questions SCORE mentoring clients ask is why do so many startups choose a limited liability company, or LLC, for their corporate form, and how is it done?
An LLC blends elements of a partnership and corporate structures to shield its members (owners) from personal liability. It is a relatively new type of business entity that emerged in the early 1990s. An LLC is a popular way to start a business or a nonprofit because of its flexibility and because it:
— Provides its members (owners) with a statutory liability shield that is essentially identical to the legal shield afforded officers of a corporation.
— Offers better federal tax benefits than corporations: the advantage of pass-through income taxation. An individual owner would report the LLC’s income or loss on Schedule C of his or her individual tax return.
— Is much more informal than a corporation; for example, if you do business through a corporation, you need to maintain a minute book. If you do business through an LLC, you don’t.
— One person can form an LLC or unlimited members, including foreigners.
Here are the steps to form an LLC in Arizona:
— Choose an available business name through the Arizona Corporation Commission.
— File Articles of Organization with the Arizona Corporation Commission.
— Create an operating agreement, which sets out the rights and responsibilities of the LLC members (not required, but advised).
— Publish the articles in a newspaper of general circulation in the county of the business. The city of Tucson requires a license.
— The LLC must obtain its own IRS Employer Identification Number, or EIN. This is so even if it has no employees.
No one should start a business unless he or she has at least a basic understanding of LLC law and taxes.
SCORE offers a more detailed examination of common types of business entities online at tinyurl.com/mehxqjm