LLC Restrictions

By April Kohl

The limited liability company, more commonly referred to as an LLC, is a half-way house between a sole trader and a corporation. It offers the protection of limited liability for the debts of the business in a similar fashion to how corporations operate, but its income and expenditures are more in line with a partnership or sole trader. Because of their nature, LLCs come with certain restrictions to how they operate.

Type of Business

In most states, there are few restrictions on the types of business that can operate as an LLC. Financial services are most commonly restricted, with LLCs forbidden to operate in the banking and insurance industries. LLCs are also often prevented from operating where licenses to practice are required, including the fields of medicine, law and accounting.

Number of People

The minimum number of people required to form an LLC is one in many states, but two people are required in others. When forming an LLC, consult the state legislation on companies or speak to an attorney specializing in company law. In some states, the definition of “person” is quite wide, and includes corporations as well as actual people. It is possible for another company to form an LLC.

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Lifespan

Some states, such as Florida, require an LLC to include a dissolution date in its Articles of Organization, which limits the amount of time the company can operate. Although the IRS code now allows an unlimited lifespan for LLCs, not all states have changed their laws. Consulting state legislation or an attorney is advisable when forming an LLC.

Stocks

An LLC does not issue stock like a traditional corporation would. Instead, each member of the LLC has his interest in the company noted in the Articles of Organization. This follows a similar line to how a partners' interests are reflected in the partnership agreement in a standard partnership. The lack of stock options limits how easily an LLC can raise capital.

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When Is it Better to Form an LLC Instead of a Corporation?

References

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