Limited liability company

Eduzendium article

The business entity you choose can greatly affect your personal liability. When shareholders or owners of a business are not personally liable for any business debts or obligations, they enjoy "limited liability." The last thing you want to do is create a business where the negligence of a partner, or even an employee, puts your personal assets at risk.

A limited liability company (LLC) is a relatively new business structure allowed by state statute. LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Also, an LLC is more like a partnership, providing management flexibility and the benefit of pass-through taxation. Owners of an LLC are called members. Since most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities. There is not limit to the number of members. Most states also permit a “single member” LLC. One which has only one owner.

What type of businesses can form a LLC?

Most businesses can form a LLC. The exception is banks and insurance companies.

How do you form an LLC?

A LLC is formed by filing a form, usually called Articles of Organization, with the Secretary of State. The corporation division of most secretary of state offices handles LLCs. Most states require an annual report be filed. The LLC is not a tax paying entity. Profits, losses, etc. flow directly through and are reported on the individual members tax returns. The only problem a LLC can have is a harder time receiving a loan to expand its business unless the individual members or the company has excellent credit.

Management Structure

The members of the company either manage the business affairs themselves or appoint a manager to operate the company for them.

Advantages of a LLC

No group of individuals stand between the members and the managers. There is a great deal of flexibility in determining a management structure for the company. The members can adopt a structure best suited to the particular needs of the company. In addition, it has no double taxation. A LLC can choose to be taxed like a partnership or a corporation.

Disadvantages of a LLC

One disadvantage is the potential of the existence of disagreement and deadlock amongst the members because each member has managing rights of the company. Another disadvantage is the requirement that active members pay self-employment, Medicare, and social security taxes to the government.

When does a LLC dissolve?

A LLC does not have an infinite life. There are three ways that would cause a LLC to dissolve. It could dissolve with the death of one of the members or the single member, a bankruptcy of an individual member or single member, or if an individual member decides not to continue with the business anymore.

Single Member Limited Liability Company (SMLLC)

Although most states permit Single Member LLCs, a traditional LLC is designed to be used by two or more members. This is because the Single Member LLC has not been fully tested before the IRS and it is uncertain as to how they will ultimately be treated in various situations. By definition, one person cannot be a partnership. Therefore, an individual organized as a LLC might lose the protection of this type of business organization.

History of the Limited Liability Corporation in the U.S.