What's an LLC?

Curious about LLCs? Here’s a guide that explains what this structure is, how you can form one and what the benefits and disadvantages are.

A limited liability company (LLC) is a hybrid legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. The owners of an LLC are referred to as members. Depending on the state, the members can consist of a single individual (one owner), or two or more individuals, corporations or other LLCs.

Unlike shareholders in a corporation, LLCs are not taxed as a separate business entity. Instead, all profits and losses are “passed through” the business to each member of the LLC. LLC members report profits and losses on their personal federal tax returns, just like the owners of a partnership.

Forming an LLC

While each state has slight variations in its requirements for forming an LLC, they all adhere to the same general principles:

Choose a Business Name. There are three general rules for your LLC’s name: 1. It must be different from an existing LLC in your state, 2. It must indicate that it is an LLC (such as LLC or Limited Liability Company), and 3. It must not include words restricted by your state (such as bank or insurance).

File Articles of Organization. This is a simple document that includes information such as your business name, address, registered agent and sometimes the names of the members. In Ohio you file with the Secretary of State, though in other states it may be the State Corporation Commission, Department of Commerce and Consumer Affairs, Department of Consumer and Regulatory Affairs, or the Division of Corporations & Commercial Code. There is typically a filing fee that must accompany the articles of organization.

Create an Operating Agreement. Most states do not require operating agreements. However, an operating agreement is highly recommended for multi-member LLCs because it structures your LLC’s finances and organization, and provides rules and regulations for smooth operation. The operating agreement usually includes percentage of interests, allocation of profits and losses, members’ rights and responsibilities, buy-out provisions and covers other important items.

Obtain Licenses and Permits. Once your business is registered, you must obtain other necessary business licenses and permits. Regulations vary by industry, state and locality.

LLC Taxes

In the eyes of the federal government, an LLC is not a separate tax entity so the business itself is not taxed. Instead, all federal income taxes are passed through to the LLC’s members and are paid as part of their personal income tax. Note that though the federal government does not tax income on an LLC, some states do.

LLCs must file a corporation, partnership or sole proprietorship tax return. Talk with your accounting professional to determine whether your LLC is automatically classified and taxed as a corporation by federal tax law, or which tax classification to choose that best meets your needs, as well as which tax forms to file. For additional guidance visit IRS.gov.

There is an additional option of requesting S-Corp status for your LLC.  You’ll have to make a special election with the IRS to have the LLC taxed as an S-Corp, and must file prior to the first two months and 15 days of the beginning of the tax year in which the election is to take effect.  The LLC remains a limited liability company from a legal standpoint, but for tax purposes it can be treated as an S-Corp. Be sure to contact the state’s income tax agency to determine how it handles an S-Corp election as well. Your accountant can best guide you in making these decisions and filing the proper paperwork.

Advantages of an LLC

Limited Liability. Members are protected from personal liability for business decisions or actions of the LLC. This means that if the LLC incurs debt or is sued, members’ personal assets are usually exempt. This is similar to the liability protections afforded to shareholders of a corporation. Keep in mind that limited liability means “limited” liability—members are not necessarily shielded from wrongful acts, including those of their employees.

Less Recordkeeping. An LLC’s operational ease is one of its greatest advantages. Compared to an S-Corporation, there is less registration paperwork and there are lower start-up costs.

Sharing of Profits. There are fewer restrictions on profit sharing within an LLC, as members distribute profits as they see fit. Members might also contribute different proportions of capital and sweat equity. Consequently, it’s up to the members themselves to decide who has earned what percentage of the profits or losses.

Disadvantages of an LLC

Limited Life. In many states, when a member leaves an LLC the business is dissolved and the members must fulfill all remaining legal and business obligations to close the business. The remaining members can decide if they want to start a new LLC or part ways. However, you can include provisions in your operating agreement to prolong the life of the LLC if a member decides to leave the business.

Self-Employment Taxes. Members of an LLC are considered self-employed and must pay the self-employment tax contributions toward Medicare and Social Security. The entire net income of the LLC is subject to this tax.

New Tax Considerations

Effective January 1, 2018, the tax audit rules affecting LLCs have changed. If you have an existing LLC, it is important to update your operating agreement to accommodate these critical changes.

Stacy is a founding member of BauerGriffith, a business law firm providing high quality legal and business counsel to a wide array of clients, with an emphasis on non-profit organizations, small business and individual planning clients. She serves as outsourced corporate counsel for diverse clients, partnering with executive management to design, plan and implement stated and defined business objectives within legal parameters.

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  • Next up: When, Where and How to Conduct Employee Workplace Searches
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  • When, Where and How to Conduct Employee Workplace Searches

    Here are a few things to keep in mind if a search of employee space or property is ever needed.

    Company searches of employee space and property are sometimes necessary to preserve safety, workplace confidentiality, and other important company policies. Employers often wonder what is fair game for a search if they suspect something is amiss, or if they want to be proactive about policy enforcement. The answer is, inevitably, “it depends.” Employers can better protect themselves from claims of violations of privacy with knowledge of a few factors for determining the proper scope of a search, as well as the correct procedures for carrying one out.

    The Reasonableness Standard

    Federal and Ohio laws give us some guiding principles on whether an investigation is legal in the first place: it is generally so if (1) there is a reasonable basis for suspicion that the particular employee has committed a breach of policy, or (2) no reasonable expectation of privacy in the item or location exists. In the employment context, there is no need for a warrant or probable cause to conduct a search.

    Expectations of Privacy

    A company typically has an unfettered interest in its property, so there is no expectation of privacy by the employee. Company items with no expectation of privacy might include lockers, desks, and company phones or vehicles. Unless your company space is clearly provided for the private use of the employee, such as a bathroom or changing room, an employee generally has few rights to privacy while on company premises.

    However, an employee has an unqualified expectation of privacy in his or her own body. Cavity searches, undergarment searches, and, in most cases, pat-downs are off limits. If a situation is so delicate and the suspicion so heightened that you feel you need to perform a physical search of an employee do not do it. Your management staff should instead contact law enforcement.

    Somewhere in the middle, an employee has a high but qualified expectation of privacy in his or her own personal belongings. This expectation may be weakened by the company’s workplace search policy if the policy identifies with specificity personal property that is subject to search. Remember, however, that a company workplace search policy must be tailored to the interests that the company seeks to protect (and at this point, we’re really talking about “reasonable suspicion,” which we delve into below).

    Reasonableness of Investigation

    If an investigation is legal, the determinative question for whether the search of any particular space is proper is whether reasonable suspicion exists that evidence of a policy violation or crime may be found there. Reasonableness is fact-sensitive and varies by the case, but the most important point is that the search itself should be tailored to its purpose and the nature of the suspected misconduct. In short: no fishing expeditions.

    There are many factors that support the reasonableness of a search. Before conducting a search, try to make sure your search hits as many of the following factors as possible:

    • whether the search was on, or of, company or personal property;
    • whether the search was of a space or item in which the employee had a diminished expectation of privacy;
    • whether there is credible evidence of misconduct;
    • whether the search is for a limited purpose and the search scope is limited to that purpose;
    • whether the employee is public or private (public employees have greater protection under the 4th Amendment; these constitutional protections have been extended to private employees in nine states, not including Ohio);
    • whether the search was conducted by authorized personnel;
    • whether the employee was notified of the search beforehand, and whether he or she acquiesced to it; and
    • whether there was a clear written policy informing workers about workplace searches.

    The search policies …

    In most cases, a well-written workplace search policy can set employee expectations for the course of employment. Your policy should be drafted by your human resources department or an attorney with experience in HR and employment law.  As to all policies, they are only as useful as your employees’ understanding of them. Before acting on a policy, you should make sure that your employee has knowledge of the policy, and ideally has signed a statement attesting that they have read and understood the policy.

    A private company sets the rules, for the most part. Employees are employed subject to your search policies – so long as the policies are legal and the employees are apprised of them upon hiring and as changes are made. Remember though, the policies should be in service of your legitimate company interests – safety, confidentiality, etc. – and should be reasonable in all respects. If the policy is unreasonable, it won’t help you much down the road if and when a company receives a claim against it.

    … And procedures

    Once you have your policies in place, assemble a team to administer the policies. Designated Human Resources personnel should be put in charge of investigating claims and carrying out searches. It’s best practice to have multiple people perform searches, with at least one recording what the search uncovered. Recordkeeping helps avoid liability if something is later reported missing.

    It’s also a good idea to be mindful of gender considerations for sensitive searches; a search should be conducted by at least one person of the same gender in case private or sensitive items must be searched.

    Reports of searches should include the reason for the search, the personnel conducting the search, the date and time of the search, the subject matter of the search, what was found, which items were seized, whether the employee was present, and what instructions were given to the employee following the search. All of this should be delivered to the Human Resources or risk management director for evaluation.

    Before developing a search plan, you should first verify available evidence of misconduct wherever possible. In developing the search protocol for any particular offense, consider the worker’s privacy expectations and map out your strategy accordingly. Always ask for written consent immediately before beginning; you should communicate the investigation process to the employee so that he or she is fully informed.

    Finally, if your policies are well-drafted, feel confident acting accordingly, but never physically detain an employee or use physical or verbal threats or coercion to enable a search. If an employee refuses to cooperate, you can assert additional disciplinary action, but be careful not to cross a line that could lead to civil liability or criminal culpability.

    Nick Weiss is an attorney at The Gertsburg Law Firm. An audit of your policies can help you avoid the pain of lawsuits. The Gertsburg Law Firm introduces CoverMySix, a one-stop legal audit for your business, led by award-winning litigators and in-house counsel. CM6 minimizes your exposure to lawsuits, investigations, disgruntled employees and customers, and all the damage that comes with them. Learn more about how to protect your business from lawsuits at covermysix.com.

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  • Next up: Who Are Millennials? What You Need to Know to Attract the Young Top Talent to Your Company
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  • Who Are Millennials? What You Need to Know to Attract the Young Top Talent to Your Company

    If they’re not already, millennials are going to be a big part of your company’s growth. Here’s how to recruit this dynamic group.

    There are 80 million millennials in the United States. There are 2.5 billion millennials worldwide. In 2016, the number of young professionals in Cleveland numbered more than 175,000 and this population growth outpaced total population growth, post-recession. Just by their scale alone, the millennial generation is a force that businesses need to be aware of.

    But it extends beyond just sheer numbers. This group also shares a unique mindset as it relates to how they approach their career. The Generation Ys, The Millennials and the Gen Nexters. When recruiting and engaging these employees where do you begin? The best way to answer that question is to get a better idea of what is motivating the millennial generation as it is a generation with its own mindset. Research suggests that millennials have different aspirations with their work:

    • They want to make a difference.
    • They are achievement-oriented.
    • They stay in positions for only 1.8 years on average.

    Now that we know a little more about this group, let’s go back to the original question above: How can employers recruit and engage this group? Let’s break it down bullet-by-bullet.

    They want to make a difference

    If you want to make a young professional happy, help her/him discover and connect to their purpose. One good way to do this is to use organizations such as Engage! Cleveland as an extension of your HR department. These organizations can introduce your millennial employee to difference-making opportunities that will help keep their batteries charged and make for a more satisfied employee. Research shows that employees who are engaged in their community are 2-3 times more likely to stay.

    They are achievement-oriented

    Related to the point above, establish creative ways to build professional skills such as getting involved in the nonprofit world. Show them how they can gain skills outside of the work place and how it will help their career. A Millennial might want to be a manager, but doesn’t currently manage other employees. As an example, managing volunteers can be more challenging than managing employees, so, if they can learn to manage volunteers at a nonprofit, they will be in a better position to someday manage employees. This is a check in the right column.

    They stay in positions for only 1.8 years on average

    If you recruit a millennial employee, you likely want that person to stick around as turnover is a big, scary word in HR. Older generations cared about one thing…drum roll please…MONEY! Salary increases aren’t the only way to increase a millennial’s job satisfaction. Offer a title change and other ways to impact their work and workplace. You might also consider other perks, such as additional vacation time or a flexible schedule. These “perks” that often don’t cost the company money are no brainers and lead to more satisfied employees.

    Also, millennials value those companies that honor work-life balance and societal issues. Think about how your organization can best offer a good work-life balance mix and perhaps hold back a bit of salary in exchange. It could very well be a win win for both you and your Millennial employees.

    A long-term force

    Millennials are going to be a force on the employment scene for some time. Estimates show that 75% of the 2025 workface will be Millennials. So it is imperative, that you think through some of the items above and how they might intersect with your company’s philosophy and you will put your company in a good position to align yourself with millennial recruits.

    And just in case you were getting tired of all of the Millennial data, don’t worry, Gen Z, those born between the mid 1990’s and mid 2000’s, will be entering the workforce soon with an entirely different set of priorities.

    Ashley Basile Oeken is president of Engage! Cleveland, a nonprofit whose mission is to attract, engage and retain young, diverse talent to the Greater Cleveland area. Learn more about her organization’s work by clicking here.

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  • Next up: Who’s the Employer Here? Understanding What Constitutes ‘Joint Employer’ Status Under the NLRB
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  • Who’s the Employer Here? Understanding What Constitutes ‘Joint Employer’ Status Under the NLRB

    What does the reversal of the joint-employer standard mean for your business?

    Recently, the National Labor Relations Board (NLRB) reversed the joint-employer standard. That decision is likely to impact a number of industries and businesses across Northeast Ohio.

    First, some background. On Dec. 14 last year, the NLRB found two or more entities are joint employers only when it can be shown that one has control over the essential employment terms of another company’s employees. This standard also requires that the control be direct and immediate instead of indirect or limited.

    The recent ruling reversed the Browning-Ferris standard, which had held that a company, its contractors and franchisees could all be considered a “joint employer” for purposes of the National Labor Relations Act.

    The prior standard applied even if the company did not have control over the terms and conditions of a contractor’s or franchisee’s workers. Under Browning-Ferris, the NLRB could find that separate organizations could be joint employers if the primary company had just “indirect control” or an ability to have indirect control over related companies.

    The Browning-Ferris standard had far-reaching impact because the alleged wrongs of one company could be imputed to other companies if it was determined that even “indirect control” might have been exerted. Thus, joint liability could be imposed on all of the entities as part of a “joint employer” web.

    What does this mean?

    This latest reversal is prompting labor and employment attorneys to closely watch how future decisions are impacted. Perhaps the most notable of these cases involves fast food giant McDonald’s and the extent to which it controls its many franchises. This new standard is likely to impact not just the McDonald’s case, but many more just like it. Stay tuned, and we’ll update this issue with further developments as they arise.

    Max Rieker is an attorney at Walter | Haverfield who focuses his practice on labor and employment law. He can be reached at mrieker@walterhav.com or at 216-928-2972.

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  • Next up: Why Background Checks Are Important
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  • Why Background Checks Are Important

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  • Next up: Why I Mentor: The Lessons I Learned
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  • Why I Mentor: The Lessons I Learned

    When I volunteered for the True2U youth mentoring program I was told, “You’ll get as much out of this as the kids.”  I nodded agreeably, but was unprepared for how profound the experience would be. There were many moments that will never be forgotten: poems written; artwork created; vulnerabilities exposed; clever thoughts shared; curiosities explored; challenges met; and frustrations and mental blocks overcome all while self-awareness awareness dawned. However, two large lessons stand out. First, the overarching themes of True2U are as valid for adults as they are for teens. Second, what it takes to be a good mentor is what it takes to be a good human. 

    When I volunteered for the True2U youth mentoring program I was told, “You’ll get as much out of this as the kids.”  I nodded agreeably, but was unprepared for how profound the experience would be.

    There were many moments that will never be forgotten: poems written; artwork created; vulnerabilities exposed; clever thoughts shared; curiosities explored; challenges met; and frustrations and mental blocks overcome all while self-awareness awareness dawned. However, two large lessons stand out. First, the overarching themes of True2U are as valid for adults as they are for teens. Second, what it takes to be a good mentor is what it takes to be a good human.  

    In my opinion the point of True2U was guiding students to know and respect their strengths, deeply acknowledge their distinctive interests, combine those strengths and interests into an understanding of their unique selves and encourage taking action to explore where that will take them. (First priority being a commitment to choose, attend and graduate from high school.) Any person doing this work will find their purpose, their job, their career, their company, their tribe, their way to make a living, their further education and their destiny. We find and expand ourselves, but we cannot do it alone. It takes interaction and support. The genius behind True2U’s effectiveness is the two-layers of high expectations, high structure and high support provided to the students (through the program) and to the mentors (as the program). There is no better way to deepen and broaden your understanding of a subject than to teach it. I found this to be true and profoundly impactful.

    I had a confident, but naïve notion that the will and skill used to help develop my career would help me to be an effective mentor. That was partially true, but largely false. Some will and skill were required, but honest, patient, curious, caring presence is what allowed the most meaningful moments. I learned this on my first day. As I and my fellow mentors launched into the first exercise, I was seated at a table with four young women. They were chatting and laughing and doing what 8th graders do.  “OK, we’re going to…”, I started and stopped.  “This exercise is all about…”, I said stopping again. Nothing was capturing their attention. As a 26-year sales and marketing veteran, I’m KNOWN for starting conversations and I was stuck.

    So the internal dialogue starts: “What ARE you doing here?” Long pause. “I just want to be of some help to these students”.  “Well, that’s a nice intention. Why don’t you just sit patiently with that and see what happens?” So I did. Uncomfortably. It felt like a half hour, but was probably 3 minutes. I noticed one of the student’s hands were bright red. I asked why and learned that she liked to style hair and was coloring last night without gloves. We related that to the exercise which and that sparked the whole table’s engagement. Being patiently present with selfless intention was That established my way to connect to with each of the students.  and  I recognized this it as a deficiency in all of my relationships most of the time. Ouch. Big lesson. Fortunately, True2U supplied me with three 8-hour sessions to practice in.  Three times eight equals 24 hours in a day. Just one day. Seldom easy, but always valuable.

    In the end, Aimee, my wife, summed it up best. “Think of how much better you’ll do next year.” That “day” of mentoring felt like a lot more and what I learned in that “day” is well beyond what I have learned in most of the 24 hours periods in my lifetime… and I will be better next year.

    Learn more about how True2U impacts both sides of the mentoring partnership.

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