In Rhode Island (RI), owners of small businesses and rental or investment real estate should form a Rhode Island Limited Liability Company (LLC) to own and operate the business or real estate. The most important reason for establishing a Limited Liability Company (LLC) is that the owners of the Limited Liability Company, who are referred to as Members, are not liable for the debts of the company.
This limited liability feature is important if a company is not able to pay its bills or if there is a lawsuit for damages or personal injuries resulting from the activities of the company or the ownership of its properties.
It is advisable to hire a Rhode Island business and corporate law lawyer/attorney to set up the LLC. Many attorneys will not only organize your LLC but will also file your annual report on a yearly basis.
The limited liability feature also applies to Rhode Island corporations, however, the significant difference between a corporation and an LLC is that a limited liability company does not pay income taxes on its profits as a corporation is required to do. Rather, if there is only one member of the limited liability company or if the members are husband and wife, the limited liability company will be disregarded for tax purposes and the income or losses of the company will be reported on the member’s tax return. If there are members of the limited liability company who are not married to each other, the limited liability company is treated as a partnership and, again, there would be no taxation of income on the company level, but profits or losses would be reported on each member’s tax return as gains or losses from a partnership.
Forming a Rhode Island limited liability company (LLC) requires that the following be done:
- Select a name for the company and confirm with the Rhode Island Secretary of State’s Office that the proposed name is not being used by or similar to another Rhode Island limited liability company.
- Draft and file with the Rhode Island Secretary of State the Articles of Organization of the limited liability company. The current filing fee is $150.00 payable to the Rhode Island Secretary of State.
- Prepare an Operating Agreement which will establish the rules for management of the limited liability company. The Operating Agreement may provide for a manager who typically is one of the members and is empowered to operate the company. Many limited liability companies, especially if they are owned by a single member or a husband and wife, are member managed, meaning that there would be no named manager, but that in fact the company would be operated by its members. The Operating Agreement would also contain provisions as to who is authorized to borrow money for the company, sign deeds or bills of sale, and do other actions which are not part of the day-to-day operation of the company. Typically, these types of actions require the consent of all the members.
- Obtain a Federal Identification Number from the Internal Revenue Service. Although, there is no income tax due from the company, a Federal Tax I.D. Number is required in order to file the Rhode Island Division of Taxation Pass-Through Income Tax Return and would be necessary if the company has any employees. There is a minimum Rhode Island fee due to the Division of Taxation for each limited liability company in the amount of $500.00 per year.
- Each year, a limited liability company must file an Annual Report. Currently, a fee of $50.00 is payable with each Annual Report.
It is important that all residential or commercial real estate owned by the LLC be transferred by deed to the limited liability company. The real estate deed should be prepared by a RI lawyer.
A limited liability company will not relieve an individual member from personal injury liability for their own actions or negligence. The general rule is that individuals are always responsible for their own negligence. However, an LLC will protect an individual member from facing personal liability for the negligence of employees or other LLC members.
There are certainly costs involved in establishing and maintaining a Rhode Island limited liability company (LLC).
The advantages of a limited liability to its members in the case of debts of the company or lawsuit especially personal injury lawsuits such as premises liability and slip and fall far outweigh the costs involved.
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“Choose a Business Name. There are 3 rules that your LLC name needs to follow: (1) it must be different from an existing LLC in your state, (2) it must indicate that it’s an LLC (such as “LLC” or Limited Company”) and (3) it must not include words restricted by your state (such as “bank” and “insurance”). Your business name is automatically registered with your state when you register your business, so you do not have to go through a separate process. Read more here about choosing a business name.” https://www.sba.gov/content/limited-liability-company-llc