Laws on How to Use LLCs

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

Each of the 50 states and the District of Columbia establishes its own rules and regulations that govern the creation and operation of limited liability companies. However, most regulations are fairly uniform and reflect the principles of the Revised Uniform Limited Liability Company Act, or RULLCA. The RULLCA does not limit the type of businesses eligible to use the LLC structure.

Ready to start your LLC? Start an LLC Online Now

Member Management

The LLC operating agreement may require members or non-member employees to perform the management functions of the business. In the absence of a clause in the agreement, most jurisdictions provide owners the right to manage business operations by virtue of becoming a member. This provides members with reasonable access to all pertinent business information and financial records, authority to bind the LLC to contracts if done within the scope of normal business procedures and equal voting rights to approve important business matters such as mergers, acquisitions, large asset acquisitions and other atypical business transactions.

Member Liability

Members of the LLC may not use the entity for purposes other than those that relate to a legitimate business. Members who act within the scope of ordinary business practices receive protection from personal liability for those actions. For example, if a member has authority to enter into a contract to purchase office supplies, that member is not personally liable to the supplier in the event the LLC breaches the contract. However, if the member acts beyond the scope of his authority, the member is personally liable to the LLC or other contracting party for any resulting losses. If the member provides the office supplier with a personal guarantee on the contract and the LLC refuses to honor the contract, the supplier has a legal claim that may be paid from the member’s personal assets since a personal guarantee is outside the scope of normal business practices.

Involuntary Dissolutions

The laws of the jurisdiction that govern the LLC may force its dissolution only when the business engages in activities that are illegal or abusive. Any member of the LLC may invoke the assistance of a jurisdiction’s courts by making an application that provides evidence the LLC consistently engages in illegal activity, that other members are using the structure to promote fraud or when other members act in manner that damages the interests of others.

LLC Taxation

The federal tax law allows an LLC to choose from three taxation schemes it may be subject to. A single-member LLC can retain its initial tax designation as a sole proprietorship or elect corporate taxation. Multi-member LLCs receive an initial designation as a partnership for tax purposes but may also elect corporate tax treatment. Both types of structures can make the election for corporate tax treatment on IRS Form 8832. This election is binding on all members and the LLC for a minimum of five years. At that time, a second election can be made to revert back to the original tax designation.