Limited Liability Company (LLC): Establishment, Requirements, Costs

Name: WINHELLER Rechtsanwaltsgesellschaft mbH
Address: Friedrich-Ebert-Anlage 37, Frankfurt am Main, Hessen, 60327
Telephone: 069 76757780
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Is a limited liability company the best option for a business?

Often it is, but it depends on the business and location. The limited liability company (LLC) quickly became one of the most popular business structures for U.S. businesses since its creation in 1977 by legislation in the U.S. State of Wyoming. LLCs now are found in all 50 U.S. states.

LLCs are widely regarded as one of the most advantageous business structures because of their combination of

liability protection,
tax treatment and
simplicity of a sole proprietorship.

Often referred to as “the best of both worlds,” (referring to partnerships and corporations) an LLC is almost a default choice of many businesses.

However, the benefits and burdens of an LLC to your business can vary as much as the unique area of activity your company engages in. Careful assessment of your business is needed to determine if this really is the best legal structure to use.

Basic requirements for an LLC

There are generally very few requirements for an LLC beyond registration with the Secretary of State where you set up your business, but this varies from state to state in the U.S. Typically, an Employment Identification number and LLC bank account are required. While not always required by each state's laws, a Partnership or Operating Agreement and Articles of Organization should set out how business decisions of the LLC will be made, and how duties, authority and profits are divided between the members.

While owners and managers of an LLC usually will get personal liability protection from the law without extensive filing requirements (as when registering as a corporation), German businesses will usually need to show an Operating Agreement for the LLC to support their visa applications with U.S. Customs.

Keep in mind not every business can operate as an LLC. For example, banks and insurance companies are typically prohibited from operating as LLCs. Many states also prohibit licensed professionals such as accountants, architects, attorneys, or physicians from forming an LLC. In such cases these professionals may be allowed to form a Limited Liability Partnership (LLP), or a Professional Limited Liability Company (PLLC) if allowed by the state laws it operates under.

Advantages of an LLC in the U.S.

The advantages of an LLC include:

Flexibility to choose their tax status
LLCs may elect to be taxed as either partnerships or S Corporations. Taxes for the LLC can be filed as they would be for a sole proprietorship or partnership, with the LLC's income and expenses reported on the Schedule C of IRS Form 1040 for individual owners (avoiding the double tax of a corporation), as well as have fewer filing requirements than corporations.
Protection against personal liability (like a corporation)
An LLC is a separate and distinct legal entity from individual owners and managers, so if someone sues your business or it is insolvent with debt obligations, personal assets of the owner and managers cannot be seized (an exception is if the owner or manager does something that personally endangers or causes injury to someone else, or potentially if they are criminally liable for an act they take as the owner or manager).
Ownership flexibility
The LLC may freely allocate percentages of the business's profits and losses between the owners as desired. Few restrictions exist regarding who can own and take profits from an LLC. In most states, any legal entity, including organizations, businesses, or individuals (as well as foreigners) and even other LLCs are eligible to form an LLC.
Management flexibility
Members and managers of an LLC can take part in daily operations and activities of the business. The operating agreements and Articles of Organization of the LLC will largely dictate the management structure for legal purposes. Most states will consider your LLC to be member-managed if you specify a management structure in your formation documents.
Minimal regulations
LLCs normally may conduct their business according to the agreements they make for themselves, often without formal legal requirements for board meetings, annual reports, or other regulatory compliance (but normally still more requirements than a partnership).

Disadvantages of an LLC in the United States

The disadvantages of an LLC include:

LLCs can have limited growth potential
Unlike a corporation, an LLC may not issue shares of stock, and the liability protection for the owners with a pass-through profit tax structure may also make raising capital difficult because investors might be hesitant to offer you funding or other capital since the LLC have any assets to recover from or provide security. Operating Agreements and other contracts can be used to build investor confidence by protecting investments, however this can become complicated.
You normally must pay a self-employment tax on profits
LLC profits pay social security, Medicare, and Medicaid tax rather than just the amount owners personally draw from that income (unless the LLC elects to be taxed as a corporation). The current self-employment tax rate is typically around 15% of the LLC income, which is on top of other taxes (this will vary between U.S. states).
Tax status in Germany
For German owned LLCs, the structure of the LLC can result in its tax status in Germany as a Corporation. Ultimately, the German tax authority will decide through its own discretion separately and independently of any U.S. qualification about taxation. We will structure your business with a strategy to maximize the benefits for your busines plan in both Germany and the U.S.

What does an LLC cost?

Which costs are associated with establishing an LLC?

Initial legal costs for establishing an LLC in the U.S. are usually between USD 50 to 200 (not including annual fees due each year, which vary from state to state). For example, a Delaware LLC costs approximately USD 90 for an initial fee to the Secretary of State, but a Texas LLC costs about USD 300; though Texas has much lower annual costs than Delaware.

The registration costs do not include fees for obtaining the necessary licenses and permits to conduct business in the U.S. state, a tax identification number (EIN or ITIN) for the IRS, or any supporting documents necessary for your LLC. It is important to note that a registered LLC alone will often be insufficient to carry out your activities legally and lucratively in the U.S. market.

An LLC must have basic underlying documents to ensure its smooth operation and legal compliance. This includes having Articles of Organization for the state government (a requirement in some states), an Operating Agreement between all your LLC managers and staff, a tax strategy with necessary registrations, the required licenses and permits to perform your LLC's business activities, and protection of your intellectual property (including registration of patents, trademarks, and copywrites in the U.S. market).

You will also need the contracts to operate your business while protecting your interests, whether in sales, joint ventures, collaborations, investment contracts, franchise agreements, employment contracts, and non-disclosure and privacy agreements. WINHELLER will handle all these components to establishing your LLC, and by knowing all aspects and needs of your business they will be done correctly to handle any commercial and regulatory needs your LLC will encounter.

How high are the yearly operating costs of an LLC?

As a general rule of thumb, an LLC should expect to pay annual fees between USD 500 to 1,000 in the U.S. state where it conducts business. State business licenses are usually required for an LLC to legally operate, and the price often depends on what type of business activity the LLC engages in; but a “general business license” fee is typically between USD 20 to 100 annually.

Almost all states require annual or biannual LLC reports to be filed with the Secretary of State to keep your LLC in good standing, sometimes costing between USD 20 to 100. Some states also require a special minimum annual tax (often called a franchise fee). States that implement these fees usually charge between USD 100 to 400, regardless of how much your LLC earns - for example, Delaware has a USD 300 flat annual LLC tax in addition to the personal or corporate income tax rate on profits. Other states such as Nevada and Wyoming have a 0 percent tax rate with no fee, whereas California charges USD 800 per year.

Many LLCs also require a registered agent to receive and forward mail or legal actions if they do not have any managers physically within the U.S. state. Many private companies provide this service for USD 100 to 300 annually depending on the complexity of the service they require.

Why choose to tax an LLC as an S Corporation?

Is it better to be taxed as an LLC or partnership?

Because an LLC can choose to be taxed as either partnership or an S Corporation, this is a decision that we will have to determine by evaluating all activities, goals, and the business plan to find the best strategy. An S Corporation status may be the best structure for your business, but you do not want the costs to outweigh the benefits.

The benefits of an S Corporation tax status include:

Flexibility on how income is treated
Some income can pass through to the owners (taxed with self-employment rates), and the rest of the income can be paid in dividends (which are not taxed under self-employment rates). This usually allows the LLC to maximize their profits against tax liabilities.
Avoiding the “double tax” that corporations are normally subjected to
This means that the owners will not pay Social Security tax and Medicare tax (the self-employment taxes) on business income from the LLC. Wages and salaries (but not dividends) paid to workers from the LLC will still be subject to self-employment taxes like a normal business.

The disadvantages of an S Corporation tax status include:

Higher Costs for establishing the LLC as an S Corp for tax purposes
The costs of establishing an LLC as an S corporation are higher because this requires more paperwork and reporting with the Secretary of State for the U.S. state the LLC is established under.
Limitation on growth potential
The LLC have no more than 100 members, allows only one class of stock, which means raising capital and investors will have some obstacles.
Residency or citizenship in the U.S. is required for all owners, which can be a challenge for German citizens.

Learn more about How to form a U.S. LLC in seven steps

Professional limited liability company (PLLC)

A professional limited liability company (PLLC) is almost identical to an LLC, but specifically for professionals that are forbidden to form an LLC, and usually exist in states that do not recognize an LLP.

PLLCs are subject to additional regulatory compliance requirements because of the nature of their professions, where limited liability can be a concern for clients and consumers. In U.S. states that have PLLCs (e.g., Texas does allow this, but California does not, and uses the LLP structure), the members of the PLLC must belong to a profession that requires a state license, which typically includes Certified Public Accountants (CPA), attorneys and law firms, medical providers, chiropractors, and architects (among others). In addition, they must only offer services specific to their profession. While Articles of Organization (like Articles of Incorporation for corporations) are sometimes required for an LLC, they are almost always required for a PLLC. Establishing a PLLC requires approval from the applicable state licensing board for the profession.

WINHELLER is setting up your business in the U.S.

As a full-service business law firm with U.S., German and other European counsel, we will evaluate your business needs based on its activities, size, and complexity to establish the right foundation for your U.S. market entry. Our services include:

Picking the right location for your business based on the local laws, and your goals
Structing your business under the most advantageous legal entity for success and personal protection
Plan the best tax strategy to maximize your benefits under local and international law
Obtain the necessary licenses and permits to carry out all your business activities
Apply for the visas your business will need to operate in the U.S.
Ensure you have the necessary protection for your business's intellectual property and trade secrets
Make sure you have the necessary internal documents to allow your business to operate and grow according to your goals
Provide all the contracts and support services to allow your business to start working

Your attorneys for setting up an LLC in the U.S.

If you have a sincere interest to expand your business and enter the U.S. market, whether to establish an LLC or invest in the U.S., our team is ready to support you. We explain all requirements establishing a limited liability company and support you on all steps ahead. Your LLC attorneys are:

U.S. Attorney Paul Bess and
Attorney Thomas Schwab (U.S. visa law).

We can provide you with a consultation and ongoing legal services in German and English. Get in touch! The easiest way to reach us is by e-mail (info@winheller.com) or by phone (+49 69 76 75 77 80). Tell us more about your U.S. business and we will offer a service package tailored to your particular needs.