The Complete Guide to Limited Liability Companies

by Jeff Franco J.D./M.A./M.B.A.

The basic structure of limited liability companies and the requirements of formation are dictated by the law of the jurisdiction in which you create the LLC. There's a high degree of uniformity among state regulations as a result of the frequent adoption of the Revised Uniform Limited Liability Company Act; however, there are still some variations from state to state.

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Member Liability

Many entrepreneurs choose the LLC business entity structure because of the limited liability it affords its members. Generally, the members who own the business have no liability for debts and obligations the LLC enters into in the normal course of business. This protection extends to situations where the LLC defaults on loans or breaches business contracts. However, third parties with a rightful claim against the LLC may seek judicial intervention and obtain a judgment that is payable from the LLC’s assets. If the members of the LLC make contributions to the business, this is the extent of their assets at risk.

Dissolution Events

Dissolution terminates the LLC as a legal entity and requires the winding up of all business affairs. Dissolution may occur in a variety of ways. Commonly, the operating agreement of the LLC may require dissolution on the occurrence of a specified event, upon unanimous member consent or when 90 consecutive days elapse without the existence of a single member of the LLC. The dissolution of the LLC may also be brought about on the application of a single member who provides the state court with evidence that substantially all business activities are unlawful, it’s not practical to continue the business, that members are engaging in criminal or fraudulent activity or members are acting in an oppressive manner that diminishes the value of other member interests.

Winding Up

When an event requires it or members agree to dissolve the LLC, members and managers must wind up all of the LLC’s business affairs. This requires the payment of all outstanding business debts and obligations, settling and closing the company and distributing the remaining assets to members. If members have no intention of preserving the business for a reasonable amount of time after dissolution, notification of the dissolution should be sent to the state office in which the LLC was created. If the LLC dissolves as a result of having no remaining members, the most recent member to leave or their representative may wind up the business.

Tax Implications

The Internal Revenue Service designates all single-member LLCs as a sole proprietorship, and all multi-member LLCs as a partnership for income tax purposes. However, members can file IRS Form 8832 to elect corporate tax treatment for the LLC. Once the election is made, the LLC and its members must adhere to all tax reporting and payment requirements the IRS imposes on legal corporations for a minimum of 60 months before a second change is allowed. Choosing to tax the LLC as a corporation imposes all tax liability directly on the LLC, whereas the responsibility to file and pay income tax in a partnership or sole proprietorship rests solely with the members.