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The facts about forming a Limited Liability Company - 1 of a 3 part series

Sunday, October 4, 2009
Recently, members of The Mom Entrepreneur Online Support Group were discussing forming a Limited Liability Company or LLC. The women in our group wanted to know why they should form an LLC, and can it be done at an affordable price?

Members all agreed the process was easy, yet most hired a lawyer to file theirs or completed it themselves.

I hired a lawyer to form both of mine because I was not aware of any other methods for doing so. I had first operated the business as a sole proprietor, but as the company grew, I felt I needed better protection and decided an LLC was the way to go.

I recently discovered an online alternative. was created by corporate and tax attorneys from some of the largest law firms in the country; lawyers who were tired of seeing entrepreneurs and business owners spend thousands of dollars on legal fees or use outdated Internet forms for an LLC Operating Agreement.

Since this was a hot topic for discussion in our Online Support Group, I contacted Adam Bergman, president of to provide readers with some insight as to why, when and how you would form an LLC.

This post is part 1 in a series of 3.

TME: What exactly is a Limited Liability Company (LLC)?
Limited liability companies (“LLCs”) are a creation of state law. An LLC is somewhat of a hybrid entity in that it can be structured to resemble a corporation for owner liability purposes and a partnership for federal income tax purposes. An LLC offers the limited liability benefit of a corporation and the single level of taxation of a partnership. The owners, not the entity, are then responsible for the payment of the tax, if any.

TME: How are LLCs structured?
LLCs are owned by investors known as members. The company is typically managed by a designated member or group of members. Like shareholders of a corporation, the members' liability is limited to the amount of their investment. For tax purposes, LLCs with more than one owner are treated as partnerships, and LLCs with one owner are disregarded. In both cases, the LLC income is taxed to the owner directly without any entity level tax.

TME: Why should a business owner set up an LLC entity?
Adam: The LLC has become the entity of choice for entrepreneurs and a significant majority of all new businesses primarily due to the following:

  • LLCs are easy and inexpensive to form
  • LLCs are recognized by all states
  • LLCs offer limited liability for all members.
  • LLCs offer one level of tax for federal income tax and state income tax purposes (in most cases).
  • LLCs provide pass through of business losses to the member or members.
  • LLCs can utilize a corporate management structure.
  • LLCs can have one member or multiple members.
  • LLCs offer flexibility in distributing cash to the members
  • LLCs offer flexibility in allocating profits/losses to the members
  • LLCs offer flexibility in conducting business affairs.
  • LLCs can exist indefinitely.

TME: Why an LLC as opposed to a corporation or staying a sole proprietor?
Under current law, unless an entrepreneur expects to go public in the near future or will be engaging in a complex cross border transaction, there is very little reason for an entrepreneur to choose to operate his or her business in any other entity form other than an LLC (i.e. “C” corporation or “S” corporation). Most of the non-tax advantages of operating in corporate form are now available in all states in the form of the LLC, and the double tax creates a clear tax bias against the corporate form.

An LLC offers all of its members’ limited liability without restrictions on their participation in the venture. Furthermore, ownership interests in the LLC can be freely transferable if its members so choose. For these reasons, it is significantly more common for entrepreneurs and new business owners to select the LLC entity form when starting a new business and not a “C” corporation or “S” corporation.

Thanks Adam! Join us next Monday for part 2 – How to form an LLC.

In celebration of Women’s Small Business Month, we are also hosting a contest for an LLC formation, LLC Operating Agreement and $500 for your business all offered by for one lucky mom entrepreneur winner.

In addition, on October 22nd at 1:00pm ET, Adam will be offering a complimentary teleseminar entitled: Protecting Yourself in Business - Why Every LLC Needs an Operating Agreement.

More details about our contest and teleseminar will follow throughout the month.

About Adam Bergman:
Adam is the president and creator of, the leading online provider of customized LLC Operating Agreements. He has worked as a corporate and tax attorney at White & Case LLP, Dewey LeBoeuf LLP, and Thelen LLP, three of the most prominent law firms in the United States where he advised thousands of entrepreneurs and business owners on a wide range of corporate and tax issues involving limited liability companies for the past seven years. Adam is recognized as a leading partnership tax expert and has lectured attorneys on the taxation of LLCs. was created in order to offer a cost effective alternative to spending thousands of dollars to form an LLC. In a few minutes online, entrepreneurs can receive a law firm quality LLC operating agreement they can trust without the law firm price.