Limited Liability Companies

A limited liability company, or "LLC", is a type of business organization. It combines the benefits of limited liability found in a corporation with the tax breaks available in a partnership. LLC's became popular due to a demand for a business setup that provides limited liability while avoiding certain double tax consequences associated with a corporation.

Many people choose a LLC if they are seeking to start a new business, and in particular small businesses. This is because of the unique structure of a LLC and the relative ease of formation procedures. For liability purposes, LLC's are treated as a corporation, but for tax purposes are more like a partnership.

Every state provides for the creation of a LLC, which in itself becomes a legal entity. However, the laws vary from state to state, so be sure to check with your local authorities if you plan to form a LLC.

Implications of "Limited Liability"

The main feature of a LLC, as its names implies, is its limited liability. Limited liability means that since the organization is a legal entity, the company is liable for losses and not the individual members.

For example, if the LLC is unable to repay a loan, creditors may only sue the company and not its members in order to collect the debt.

Members of a LLC are not entirely free from liability though. For example, they are still liable for personal acts of negligence.  They will also be held liable if they personally vouch for certain debts, or if the member uses LLC funds for fraudulent purposes.

Forming, Operating, and Dissolving an LLC

LLC's are formed by filing a certificate of formation with the Secretary of State where the business will be located. Filing documents are also called "articles of organization". These documents usually contain the company's name, address, and an agent who is responsible for acting on behalf of the LLC.

Owners in a LLC are called "members", and have authority to help manage the organization. Unlike a regular corporation, LLC's may have an unlimited number of owners, and anyone can become a member; states usually require at least two members. LLC members may choose to delegate their authority to a board or a group of members.

Operation of a LLC is usually outlined in what is known as an "operating agreement", which is basically like a corporation's bylaws. The operating agreement dictates such procedures as fundamental organization changes, distribution and sale of shares, and dissolution procedures.   

Dissolving a LLC may become necessary due to unanticipated changes or disagreements. Procedures for dissolution are usually contained in the private operating agreement. Usually, if any one member resigns, retires, or becomes deceased, the LLC automatically dissolves unless the remaining members expressly consent to continue. Members can also move to dissolve the LLC at any time, though the process can be often be complicated.

Recap- Considering Whether a LLC is Right for You

There are many benefits and some drawbacks in forming a LLC. They are a relatively new creation but they are also a popular choice these days. Consult a lawyer if you are considering forming one. Here are some points to consider regarding limited liability companies: