What Type of Business Qualifies As an LLC?

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

The laws of each state and the District of Columbia govern all aspects of a limited liability company created within its jurisdiction. A majority of these jurisdictions adopt some form of the Uniform Limited Liability Company Act, which imposes minimal restrictions on the type of business you can operate under an LLC structure. However, most states do not allow a bank or insurance company to use an LLC structure.

The laws of each state and the District of Columbia govern all aspects of a limited liability company created within its jurisdiction. A majority of these jurisdictions adopt some form of the Uniform Limited Liability Company Act, which imposes minimal restrictions on the type of business you can operate under an LLC structure. However, most states do not allow a bank or insurance company to use an LLC structure.

Personal Liability

The LLC entity protects owners from incurring personal liability for the debts and obligations of the business. This protection is inherent in the LLC structure and is unaffected by the type of business operations in which you engage. When you enter into contracts or obtain financing on behalf of the business, the LLC entity is solely liable for those obligations. Creditors and other contracting parties are unable to enforce agreements against individual members. However, if a member of the LLC acts beyond the scope of his authority or issues a personal guarantee, that specific member may be personally liable in the event the LLC is unable to satisfy the obligation.

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Ownership Transfers

Other members of an LLC may hinder your ability to transfer both your financial and management interest depending on the type of business it operates and the terms of the operating agreement. For example, if you and two other members offer technology consulting services that generate the majority of revenue, the other members may disallow any transfer of your interest since the sole value of the LLC is the expertise of each member.

Fiduciary Duties

All jurisdictions impose a minimum standard of conduct on LLC members, often times known as fiduciary duties. A notable standard is the duty of loyalty of each member to the interests of the LLC and other members. This standard requires that you put the LLC’s interests before your own and to refrain from usurping LLC business opportunities. However, evaluating the occurrence of a breach must take the type of business the LLC operates into consideration. For example, if the LLC is a wholesaler of specialty food products, soliciting a potential customer with the food products of a similar business in which you also hold an interest will constitute a breach. However, approaching the prospective client with a friend’s business card for accounting services does not on its face constitute a breach.

Taxation

The Internal Revenue Service treats all LLCs as a partnership for tax purposes if more than one owner exists; otherwise, the LLC is subject to the tax rules applicable to sole proprietors. In both cases, the LLC members may elect corporate tax treatment by filing IRS Form 8832. Provided the LLC business is in an industry other than banking and insurance, the federal tax law will recognize the business as an LLC if authorized under state law. The tax rules governing partnerships and sole proprietorships impose principles of pass-through taxation. These principles disregard the business entity as a taxpayer separate from its owners and require that each owner report and pay income tax on their respective shares of business profits and losses.

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References

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