Does LLC Mean Incorporated?

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

A limited liability company is a legal business entity similar to a corporation. Although formation requirements are similar, incorporation only refers to the process of creating a corporation. However, just as shareholders have ownership interests in the corporation, an LLC has members who each own an undivided portion of the business assets. Creating a business using an LLC allows members to operate almost any type of business while enjoying limitations on their personal liability.

A limited liability company is a legal business entity similar to a corporation. Although formation requirements are similar, incorporation only refers to the process of creating a corporation. However, just as shareholders have ownership interests in the corporation, an LLC has members who each own an undivided portion of the business assets. Creating a business using an LLC allows members to operate almost any type of business while enjoying limitations on their personal liability.

Contribution

An LLC may require its members to make periodic contributions of property, services or money to the business. Failing to provide the LLC with required contributions may impose personal liability on a member if the LLC suffers loss or damage as a result. An obligation to make contributions survives a member’s death, disability or incapacity. In the event of a member’s death, the LLC has a rightful claim against his estate for unpaid contribution obligations that existed prior to death. In all other cases, the LLC may sue the member and seek a judgment paid from the member's personal assets.

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Distribution Limits

The laws governing LLCs provide owners with great discretion in determining the amount and timing of profit distributions. However, the LLC cannot provide members with a distribution payment if the payment causes it to be insolvent. Insolvency of the LLC requires that it be unable to meet ordinary business obligations as they become due, or the balance sheet reports liabilities in excess of assets immediately after the distribution. In making this determination, it is acceptable to rely on generally accepted accounting principles. Potential insolvency of an LLC does not take into account future contingent liabilities.

Member Compensation

An LLC member who provides management or other services to the business has no entitlement to compensation under most state laws. The only exception is for the services a member provides in winding up the business. However, the member does have a right to receive reimbursement from the LLC for all out-of-pocket expenses that relate to business activities. The LLC is permitted to provide members compensation if the operating agreement allows for it and the member takes on a management role. Payments to non-manager members are treated as distribution payments or a return of capital rather than employment compensation.

Non-Member Management

Where the operating agreement of the LLC provides that non-members shall run the business, those managers have the exclusive right to make all decisions that affect the LLC. Important business decisions require a majority vote of all managers to take a course of action. However, managers must obtain unanimous approval from all members before selling, leasing, exchanging or disposing of any asset if the transaction is outside the scope of ordinary business activities. Unanimous member approval is also necessary to enter into a merger or acquisition transaction.

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LLC Liability Limits

References

Related articles

Does a Limited Liability Company Have Shares?

Ownership interests in a limited liability company business structure are not represented by shares. Shares in a company are only issued for businesses that use the corporate structure. The owners of an LLC are called members, and each has a membership interest representing an undivided claim in all assets of the business and the right to a portion of business profits.

LLC & Profit Distribution

The members of a profitable limited liability company are entitled to receive periodic distributions from the business’s earnings. Most jurisdictions provide the framework for the types of distributions that may not occur. However, LLC members are free to stipulate the terms and eligibility requirements for distributions that do not inherently violate state regulations.

LLC & Ownership Liability

The owners, who are known as members, of a limited liability company often choose this business structure because it protects their personal assets that do not relate to the business. However, the members may be personally liable when their actions are outside the scope of the LLC; they are personally liable if they offer creditors personal repayment guarantees or make unauthorized decisions on behalf of the LLC.

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