A limited liability company, or LLC, is a type of business entity that differs from a corporation or partnership in that it is intended to protect its members against personal liability. LLCs also enjoy certain tax advantages that lessen paperwork requirements and the likelihood of tax errors and liability. LLCs are not completely immune from liability, however, and LLC members should take certain precautions to preserve the LLC's limited liability status.
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Personal Liability Protection
The primary benefit of an LLC is that it is designed to protect its members against personal liability. This means that the members of the company are generally not personally liable for the debts and obligations incurred by the LLC, and their personal bank accounts, property and other possessions are protected in case a lawsuit arises. However, this protection from liability is not absolute, and LLC members should be aware of the exceptions to the general rule of limited liability.
There are generally four exceptions to the limited liability premise. First, any claims arising out of a member's own fraud, negligence or willful misconduct are not protected against liability. Second, liability is not limited if the owner of the LLC fails to identify the LLC in a contract, or fails to disclose that she represents the LLC in a contract. Third, if the owner of the LLC personally guarantees a contract, or otherwise co-mingles her personal business with the LLC so as to blur the lines between the two, she may be held liable for any violations of a contract. Finally, liability could result if the LLC makes any distributions in violation of state regulation or even its own operating agreement.
Tax Liability Protection
Another advantage of an LLC, besides the general shield against personal liability, is that it avoids the double taxation that affects other business entities. In other words, only the members of the LLC are taxed and not the LLC itself. This results in less paperwork and red tape, thus potentially reducing the possibility of tax disputes and audits.
Precautions Against Liability
Members can take certain precautions to protect an LLC's limited liability status: avoiding personal guarantees to creditors, keeping personal business separate from that of the LLC, and providing business insurance in case of any potential lawsuits. LLC members should also act ethically at all times and consult with an experienced business law attorney for advice in the event any issue arises.