A limited liability company (LLC) is a common way entrepreneurs structure their business. It is somewhat of a hybrid between a corporation and a partnership, and incorporates features of both. State law governs limited liability companies and other entities. Some states have their own unique laws regulating such entities, while other closely mirror the model Uniform Limited Liability Company Act (ULLCA).
Thus, these businesses may operate a bit differently depending on the state where they form. However, there are a handful of characteristics common to all LLCs.
Personal Liability Protection
Similar to a corporation, an limited liability company is considered a distinct legal entity separate from its owners, referred to as members. Because of this, it offers its members personal liability protection. This means that their personal assets are shielded from creditors or other parties in the event the company is involved in any litigation. Thus, while a creditor can sue the LLC to collect a debt, they usually cannot sue an individual owner for the debts of the business.
Personal liability protection is one of the key characteristics and is why it is so popular among entrepreneurs. There are very narrow circumstances where a member can be held personally liable, but those are generally few and far between.
Paying Federal Taxes
The Internal Revenue Service (IRS) does not have a taxation category for LLCs. Of course, this does not mean that the company or its owners do not have to pay taxes. During formation, the IRS provides members with the ability to decide how they want the company to be taxed.
It can either be taxed as if it were a corporation or as if it were a partnership. If taxed as a corporation, the LLC itself pays federal income taxes. If taxed as a partnership, it does not pay any taxes. Instead, the profits pass through to its owners who pay taxes on it through their personal tax returns.
Similar to a partnership, one of the other advantageous characteristics of an LLC is that it allows for increased management and operational flexibility, as opposed to the rigid requirements of a corporation. They can have an unlimited amount of owners or it can have a single member. They may be an individual or another business entity.
Unless the company's governing documents state otherwise, all owners are allowed to participate in managing the business. They can even assign their interest to another member, with the only obligation being that they must notify the relevant state agency. They can also choose to have a third party manager to oversee the company. Of course, this will depend on if all owners agree to how the business will be managed. In addition, unlike a corporation, LLCs do not have to have a board of directors or hold regular member meetings.
There are many benefits to forming an limited liability company. If you are considering formation, make sure that you are aware of the various options and choose which operating structure is most appropriate for you and your business needs. You can have your company opened in no time.
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