What Does LLC Mean for a Company?

By Tom Streissguth

First authorized by laws passed in Wyoming in 1977, the limited liability company, or LLC, is a fairly recent development in the business world. The LLC structure allows business owners to organize a firm that protects them from personal liability for debts and other financial obligations should the business fail. It is a useful structure for small businesses that want the advantages of a basic partnership without the obligations attached to forming a corporation.

First authorized by laws passed in Wyoming in 1977, the limited liability company, or LLC, is a fairly recent development in the business world. The LLC structure allows business owners to organize a firm that protects them from personal liability for debts and other financial obligations should the business fail. It is a useful structure for small businesses that want the advantages of a basic partnership without the obligations attached to forming a corporation.

Basic Structure

The LLC is a business entity formed and operated by members. A member may be an individual, a group of partners or another business, including a foreign company. The law generally protects members of the LLC from personal liability for debts contracted by the organization, unless the members have provided a personal guarantee for those debts, or a court deems that the LLC members engaged in fraud or some other illegal activity as part of the LLC's business.

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Income and Taxes

The profits of an LLC are distributed directly to the members as personal income for federal tax purposes. The Internal Revenue Service does not recognize the LLC as a business entity for tax purposes. Instead, the LLC may select its own taxation classification: either sole proprietorship, partnership or corporation. An individual who organizes an LLC may have the entity disregarded entirely by the IRS, and simply pay personal income taxes on the LLC's net income.

Organization

Unlike a formally incorporated business, the LLC is not required to designate officers or shareholders, or hold regular meetings. There is a much lighter burden of required paperwork -- LLCs are not required to keep resolutions and meeting minutes, hold regular shareholder meetings, or votes on the election of officers or substantial business decisions.

Establishment

Members of an LLC must file paperwork setting up the company with the secretary of state in their home state. This usually includes Articles of Organization and an agreement setting out the terms of operation, such as a mission statement, income distribution and ownership positions. Each state has its own laws regarding LLCs and their operation.

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References

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