Delving deeper into LLC

by Clark Kelly

Published on this site: December 16th, 2005 - See more articles from this month

Limited Liability Company or LLC is what you will get when you combine the attributes of both corporations and partnerships. So this is like corporation's protection from personal liability for business debts and the pass-through tax structure of partnerships and sole proprietorships put together.

While setting up an LLC is more difficult than creating a partnership, or sole proprietorship, running one is considerably easier than running a corporation.

What are the main features of LLC?

Limited Personal Liability. As with shareholders of a corporation, all LLC owners are protected from personal liability for business debts and claims.

This means that if the business itself cannot pay a creditor, such as a supplier, a lender, or a landlord, the creditor cannot legally come after any LLC member's house, car, or other personal possessions. Since only LLC assets are used to pay off business debts, the owners will only lose the money that they have invested in the LLC.

However there are some exceptions to limited liability.

It is important to realize that this protection for personal liability for the business transactions is not absolute. An LLC owner can be held personally liable if he or she: personally injures someone, guarantees a loan or business debt, fails to deposit taxes from employee’s wages, intentionally does something fraudulent or clearly wrong-headed that causes harm to the company or to someone else and treats the LLC as an extension of his or her personal dealings, rather than as a separate legal entity.

Business Insurance. A good liability insurance policy can shield your personal assets when limited liability protection does not. Insurance can also protect your personal assets in the event that your limited liability status is ignored by a court.

In addition to protecting your personal assets in worst situations, insurance can protect your corporate assets from lawsuits and claims. However, commercial insurance usually does not protect personal or corporate assets from unpaid business debts, whether or not they are personally guaranteed.

LLC Taxes. Unlike a corporation, an LLC is not considered separate from its owners for tax purposes. Instead, it is what the IRS calls a "pass-through entity," a partnership or sole proprietorship.

This means that business income passes through the business to the LLC members, who report their share of profits, and losses, on their individual income tax returns. Each LLC member must make quarterly estimated tax payments to the IRS.

LLC Management. The owners of most small LLCs participate equally in the management of their business. This arrangement is called member management.

The alternative management structure means that you can designate one or more owner to take responsibility for managing the LLC. The non-managing owners simply sit back and share in the LLC profits.

In a manager-managed LLC, only the named managers get to vote on management decisions and act as agents of the LLC. Choosing manager management, however, can complicate securities issues for your LLC.

How do you form an LLC?

To create an LLC, begin filing articles of organization with the LLC division of your state government. This office is oftentimes in the same department as the corporations division, which is usually part of the secretary of state's office. Filing fees are $100 or less.

After that, you can now form an LLC with just one person in every state. There is no maximum number of owners that an LLC can have. But for practical reasons, you probably would want to keep the group small. An LLC that is actively owned and operated by more than about five people risks problems with maintaining good communication and reaching agreement among the owners.

Your LLC must fulfill the same local registration requirements as any new business, such as applying for a business license and registering a fictitious or assumed business name.

How do you end it?

When one member wants to leave the LLC, the company dissolves. This is based upon the laws of many states, or unless your operating agreement says otherwise. If this is the case, the LLC members must fulfill any remaining business obligations, pay off all debts, divide any assets and profits among themselves, and then decide whether they want to start a new LLC to continue the business.

Clark Kelly writes regularly for http://www.biz-tasks.com where you can find articles on business development and applications.