LLC or Corporation? How to Choose When Forming Your Business? (Part 2)
Part 1 focused on forming and managing corporations in North Carolina. In Part 2, we turn to limited liability companies in North Carolina.
Limited Liability Companies
LLCs are formed by, and can have, one or more members. An LLC can be managed by either the members or one or more managers appointed by the members. An LLC offers broader flexibility in this regard, since an LLC could even have officers (like in a corporation), if the members so decided. As with a corporation, an LLC is a separate legal entity and can own real and personal property, incur debt, enter into contracts, etc.
Taxation: LLCs also offer broad flexibility in terms of taxation. An LLC with two or more members will generally be taxed as a partnership, while an LLC with one member will be taxed as a sole proprietorship. However, an LLC can also elect to be taxed as a corporation.
Formation: LLCs are formed in North Carolina by the filing of Articles of Organization with the Secretary of State, along with a $125 filing fee. The Articles of Organization contain incorporator information, registered agent information, and perhaps most importantly, the election as to whether the LLC will be member- or manager-managed.
Management: Depending on the election in the Articles of Organization, an LLC will be managed by either its members or one or more managers appointed by the members. The members will create and execute an Operating Agreement, which lays out the duties of the members, the duties of the managers (if the LLC has managers), buy/sell provisions, etc. The Operating Agreement also designates the capital contributions (i.e., the money or property put into the LLC by each member).
Member Liability: Typically, members of an LLC will not be personally liable for the debts of the LLC (with the exception of the portion of the LLC they own). However, a member could be liable if he/she personally guaranteed a debt of the LLC. Also, if the LLC was formed solely to defraud others, or created solely as an alter ego of the member(s), a court will invoke the “alter ego” doctrine, and hold members of the LLC personally liable.
Upkeep: An LLC is not required to have annual meetings or appoint (or re-appoint) managers on an annual basis. Maintaining the records of the LLC is therefore typically easier. Furthermore, the Operating Agreement will generally allow managers to handle most business (including incurring debt) on behalf of the LLC, so additional consents are not generally needed when the LLC is taking out a loan.
The LLC is still required, like the corporation, to file an Annual Report with the North Carolina Secretary of State (and failure to do so may result in administrative dissolution), along with a $200 fee.
When determining whether to form an LLC or corporation (or, in some cases, other forms of entities not discussed in detail in this two part blog post), consult with your attorney and your accountant, in order to determine which form of entity will make the most sense for your business. If you are purchasing land for your business to operate on, it may even be best to form both an LLC (to hold the land) and a corporation (to run the business and lease the land from the LLC). Every situation is unique and should be analyzed appropriately.
