Legal Meaning of LLC

by Rob Jennings J.D.
An LLC has certain characteristics of both a corporation and a partnership or sole proprietorship.

An LLC has certain characteristics of both a corporation and a partnership or sole proprietorship.

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The "LLC" designation at the end of a company's name stands for "limited liability company." While businesses used to organize as partnerships or corporations, the LLC has stepped to the forefront as a preferred form of corporate existence for many large and small businesses. Organization as an LLC means several things for the business.

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Separate Legal Existence

When a company organizes as an LLC, it establishes a legal existence separate from that of its owners, who are called members. Attendant to its separate existence, it has the capacity to sue and be sued, to buy and sell property and to incur and pay debt. A judgment against any of the members will not automatically create a judgment against the company. This can create complications for those trying to collect on a judgment against an individual whose property actually belongs to a company.

Limited Liability For Members

The LLC designation after a company name also means that provided they have followed all requirements of state law, they will enjoy protection against suit for the torts or civil wrongs, committed by co-members or employees. Under the doctrine of respondeat superior, a person can be held liable for the torts of his agents and as such, in a sole proprietorship, if an employee hurts someone on the job, the company owner can be sued and lose everything. With an LLC, a claimant injured by an employee or agent of the company in the course of business can sue that individual and the company jointly, but not the individual members. The LLC acts as a shield in civil cases.

Pass-through Taxation

A company organized as an LLC also gives its members the opportunity to avoid double taxation. With traditional corporations, the company pays tax on its profits and the shareholders pay on their dividends. As such, the government takes a bite out of at the corporate level and another one at the shareholder level. With an LLC, the money flows through the company and onto the members' individual returns. While the same tax benefits are available to corporations by electing to file under Subchapter S of the Internal Revenue Code, incorporation is not always the best choice for every business.

Compliance With Formalities

The LLC designation at the end of a company name also signifies that its members have, or were supposed to, file articles of organization with the secretary or state or corporations in your state capitol. If the company is a "foreign," or out of state LLC, it was supposed to file a certificate of authority establishing its existence in your state. Both articles of organization and certificates of authority provide key information about the company, such as the identities of the members and managers and the name and address of a registered agent for service of process. The LLC is also required to file an annual report updating its information. If you have a claim against an LLC and the secretary of state has no record of the company, you may have a claim against the individual members and their assets.