What Is the Structure of an LLC?

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

State law dictates how you can form a limited liability company business entity and the structure it must maintain to retain its LLC status. Most jurisdictions throughout the nation have similar structure requirements. However, for federal tax purposes, the IRS allows an LLC to elect the tax treatment of a corporation.

The LLC

Limited liability companies are entities separate and distinct from their owners, who are known as members. The business may incur debts, enter into contracts and be a plaintiff or defendant in a lawsuit. The liabilities an LLC incurs remain the sole responsibility of the business entity. If the LLC elects corporate tax treatment, it is also solely responsible for filing an annual tax return and paying the appropriate amount of income tax on business profits. Limited liability companies taxed as a partnership are responsible for preparing an annual partnership return, but have no liability for taxes due on business profits.

Membership

The members of an LLC have ownership interests in the business similarly to a shareholder’s interest in a corporation. However, the LLC structure is notably different in that members also have a management interest. This entitles them to actively engage in the management of the LLC or to designate another individual to perform all management functions. This structure provides an LLC member with more control over an investment in the business. If the LLC elects corporate tax treatment, the members' personal tax situations are unaffected by the LLC’s filings and tax payments. However, if the LLC is taxed as a partnership or sole proprietorship, the members are responsible for including their share of business profits on their personal tax returns and paying the appropriate taxes.

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Member Contributions

Although there is no requirement to make capital contributions to an LLC, members are the sole source of capital infusions into the business other than creditors who provide debt financing. However, if gaining membership to the LLC is made conditional on you providing future contributions, the LLC and its members have a legal claim against your personal assets for any contributions you fail to make.

Operating Agreement

The structure of the LLC is relatively straightforward; however, altering how the LLC operates may require structural changes within the organization. Most states do not require the existence of an operating agreement, but most LLCs with two or more members will draft one. The operating agreement can alter the members’ rights and responsibilities imposed by state law. A valid operating agreement may include any clause that does not provide for illegal activity. For example, the operating agreement may restrict a member’s ability to manage the day-to-day operations of the business by requiring the LLC to hire outside employees to run the business.

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What Are the Legal Responsibilities of Limited Liability Companies?

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Benefits of Opening an LLC Company

Choosing a limited liability company as the legal entity for your business may provide benefits not available with other types of entities. Most states throughout the nation adopt similar requirements for creating an LLC. However, you must consider your individual needs and the type of business you will run to ensure that an LLC is the appropriate structure.

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.

Does LLC Mean Incorporated?

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.

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