What Are the Legal Responsibilities of Limited Liability Companies?

By Tom Speranza, J.D.

What Are the Legal Responsibilities of Limited Liability Companies?

By Tom Speranza, J.D.

A limited liability company (LLC) is a business entity recognized in all 50 states that provides the owners, called members, with the liability protections of a corporation combined with the flexible structure of a partnership. An LLC is considered a separate legal entity that is distinct from its members and has various obligations under federal, state, and local law.

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Company Liabilities and Employee Actions

An LLC's primary legal obligation is to pay and otherwise fulfill the debts and contractual obligations it incurs. As a business entity, an LLC has the power to take many of the actions an individual can, like borrowing money, owning real estate, signing contracts, hiring employees, and engaging contractors. In exchange for the ability to incur liabilities, there is a legal obligation to comply with the responsibilities they entail, such as making scheduled loan payments, performing under contracts, paying wages to and withholding taxes for employees, and compensating contractors.

Additionally, like other business entities, an LLC is legally responsible for actions that its employees take within their scope of employment. For example, if an employee's job duties require them to deliver products to customers, the business is liable if the employee causes a car accident while driving their route. It would not be held liable, however, if the employee causes an accident while running a personal errand.

Unless an LLC member has contractually agreed to guarantee or otherwise stand behind the business's liabilities, the member is not liable for the company's debts and obligations if there are defaults or a failure to perform.

Entity Formalities

Although there are generally fewer entity-related responsibilities than corporations, most LLCs are legally obligated to perform under an operating agreement that sets out how the company's members, managers, and officers conduct business. Operating agreement obligations typically include:

  • Holding member and manager meetings to make certain company decisions
  • Maintaining the company's books and records, compiling financial statements, allocating income, losses, and expenses to the members, and making any required tax filings
  • Distributing the available cash flow to the members
  • Keeping records of any transfers of membership interests and updating the operating agreement accordingly
  • Winding up the company's business, liquidating the company's assets, paying off the debts, and distributing the remaining assets to the members if the LLC decides to end its legal existence

Taxes and Reports

Most LLCs are taxed as partnerships, so they allocate all income, losses, and expenses to the members who then pay any required federal and state income tax on their individual tax returns. In certain cases, however, such as when electing corporate taxation, an LLC must pay taxes directly and is also responsible for applicable sales and franchise taxes.

In addition, many states require annual or biennial (every two years) reports to be filed in order to update their current business locations and activities in the state and to identify their current members and managers. Most states require the payment of a fee when the report is submitted.

Registering in Other States

If an LLC has a business presence, or some form of physical business location, in a state other than the state where it formed, that state can require a formal qualification to do business in the state as a "foreign" LLC. If registering in another state, it must file an application disclosing some basic information about the company and pay the required fee. A registered foreign LLC is subject to the nonformation state's laws, including its obligations to file periodic reports, and pays state and local taxes to the extent required.

Make sure your operating agreement outlines who is responsible for the different aspects of your business in order for your LLC to be protected. Paying attention to and following through with all the different legalities involved with operating an LLC is important so your business doesn't fall into any legal trouble.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.