How to form an LLC in Hawaii, USA
Why an LLC?
Two major reasons for forming an LLC are:
Personal liability protection
The primary reason small business owners and real estate investors choose to form an LLC is to protect their personal assets, such as their home, car or family savings. In the event of a lawsuit or if your business should fail, your personal assets cannot be touched, assuming you have properly formed, capitalized and maintained the LLC. This limited liability feature of LLCs is not available in a sole proprietorship or general partnership, where the participants are personally liable for all business debts.
As liability insurance becomes more expensive for less coverage, asset protection is becoming more of a critical factor for entity selection. LLCs provide another layer of complexity, giving you protection for your home and other personal assets.
- Flexible taxation – LLCs, by default, are treated as “pass-through” entities for tax purposes, much like a sole proprietorship or partnership. This means that LLCs avoid double taxation. Alternatively, an LLC may elect to be treated like a corporation for tax purposes, whether as a C corporation or an S corporation.
- Flexible management – Members have greater flexibility in structuring the limited liability company than is ordinarily the case with a corporation, including the ability to divide ownership and voting rights in unconventional ways while still enjoying the benefits of pass-through taxation.
Advantages of a Hawaii LLC
Owners of a LLC have the limited liability protection of a corporation.
Flexible profit distribution
Limited liability companies can select varying forms of distribution of profits. Unlike a common partnership where the split is 50-50, LLC have much more flexibility.
Corporations are required to keep formal minutes, have meetings, and record resolutions. The LLC business structure requires no corporate minutes or resolutions and is easier to operate.
All your business losses, profits, and expenses flow through the company to the individual members. You avoid the double taxation of paying corporate tax and individual tax. Usually, this will be a tax advantage, but circumstances can favor a corporate tax structure.
Creditors’ passive rights
Creditors do not get control rights
Section 428-504 provides that if a judgment creditor of a member obtains a charging order against the member’s distributional interest, it “constitutes a lien on the judgment debtor’s distributional interest”. That is, a charging order requires the LLC to pay the judgment creditor any distribution that would otherwise be paid to the judgment debtor. But the judgment creditor does not have a right to participate in management.
A court may foreclose on the lien and order the distributional interest to be sold. A purchaser at the foreclosure sale obtains only the rights of a transferee. Obtaining a charging order and a foreclosure sale are the judgment creditor’s exclusive remedies.
The Hawaii LLC Act has an unusual provision related to what are called “events of dissociation.” Section 428-502 provides that a person ceases to be a member of an LLC when the person transfers all of his or her distributional interest. In addition, section 428-601 provides a person ceases to be a member when the person makes a transfer for the benefit of creditors, becomes a debtor in bankruptcy, or fails to contest a petition seeking the appointment of a trustee, receiver, or liquidator of the person or of all or substantially all of the person’s property.
When a member becomes dissociated from an LLC, section 428-701 requires the LLC to purchase the former member’s distributional interest. The LLC must pay the “fair value” of the distributional interest as of the date of dissociation. The LLC must deliver a purchase offer to the former member within thirty days. Although this provision of the Hawaii LLC Act is unusual because most states do not have a similar requirement, the provision enhances members’ ability to protect their control of an LLC.
Because of the advantages of forming an LLC in Hawaii, over 7,500 new LLCs are formed in the state each year.
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