What Is Important in an LLC?

by John Cromwell

A limited liability company is a relatively new type of business organization. Introduced more than 30 years ago, the LLC was meant to combine the best attributes of partnerships and corporations. It is important to know that while LLCs share common characteristics, these organizations are regulated by state law. This means that some elements of an LLC may vary from state to state, such as the process for becoming an LLC.

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Limited Liability

One of the chief characteristics of an LLC is that it limits its owners’ liability for business obligations. If an LLC lacks the funds to pay off its debts, the owners of the business generally do not have to make up the difference with their own personal resources. There are two exceptions to this rule. The first is if an owner personally guarantees a loan for the LLC. The second exception is called “piercing the veil.” If the owners of the LLC misuse the business’s funds, do not put enough money into the business or use the LLC to defraud others, the owners may be personally liable for the LLC’s obligations.

Management

Compared with a corporation, which requires numerous steps to make significant business decisions, an LLC is not nearly as formal. LLCs have the option to structure their voting requirements, how owners can call meetings and other operating matters how it wants. However, an LLC generally must maintain certain records, such as financial reports and minutes of meetings to ensure that it retains its limited liability. These requirements are defined by the law of the state where the LLC is organized.

Limitation of Authority

Another benefit of an LLC is that the owners' responsibilities for the day-to-day management of the business can be limited. In a manager-managed LLC, only specific, identified individuals are involved in daily operations; all other owners do not get to participate and cannot enter into contracts on the LLC’s behalf. In a member-managed LLC, however, all of the owners can participate in the management of the business and enter the business into legally binding agreements.

Taxation

The IRS does not recognize the LLC as a taxable entity, so an LLC can choose how it wants to be taxed. It can be taxed as a corporation, partnership or sole proprietorship if the LLC only has one owner. Many LLCs choose to be taxed as a partnership or sole proprietorship to avoid double taxation. This means the LLC is not taxed, but its owners must pay tax on their share of the business’s income on their personal income tax returns.