Legal Business Description of LLCs

by Beverly Bird
An LLC offers its members the liability protection of a corporation and the tax advantages of a partnership.

An LLC offers its members the liability protection of a corporation and the tax advantages of a partnership.

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First recognized in 1977, limited liability companies are a legal cross between corporations and partnerships. Since 1997, the Internal Revenue Service has allowed LLC owners, who are known as members, the option of taxation as a corporation. If they do not elect taxation as a corporation, the IRS taxes a single-owner LLC as a sole proprietorship and a multi-member LLC as a partnership. Individual state laws govern the formation and requirements of limited liability companies.

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Governing Laws

Most states require filing “articles of organization” with the secretary of state to open an LLC, listing the name of company, its registered agent and its organizer. Other information might also be necessary depending on individual state laws. When articles of organization are filed and the filing fee is paid, the LLC is an official entity.

Members and Voting Power

An LLC member might be a person, partnership, corporation or other legal association. Some members might own a higher percentage of the LLC than others depending on their financial contribution at the inception. Members with more of an ownership typically have more voting power. However, some limited liability companies are set up to allow each member one equal vote. A member’s interest can be sold or transferred to someone else without the approval of the others, but the new member receiving the interest might not be permitted a vote or a say in management without the unanimous approval of other members.

Time Limits

The duration of an LLC is usually set in its articles of organization. An LLC may dissolve regardless of the end date in the articles of organization if any member dies, withdraws or files for bankruptcy, but this depends on individual state laws and the provisions set out in the articles of organization for compensating a withdrawing member. An LLC's operating agreement can also address the perpetuity of the business if it isn't noted in the articles of organization.

Taxes and Other Liabilities

LLC members are protected against liability for the company’s debts. State laws are still evolving regarding members’ liability for the LLC’s civil or criminal wrongdoing, however. In Colorado, Minnesota and Illinois, members are liable for their company’s debts if the LLC engages in fraudulent activities or if they do not provide the LLC with enough capital to operate. When an LLC does not elect to be taxed as a corporation, its members pay taxes only on their shares of the profits based on the extent of their membership; the entity is exempt from corporate income tax.