What's an LLC?

By Holly Cameron

An LLC, or limited liability company, is a flexible form of business entity that provides its owners with the safeguard of limited liability. An LLC can have any number of owners, known as members, so the entity is suitable for both sole proprietors and larger businesses. Although each state has its own laws for LLCs that are registered within its jurisdiction, the general rules regarding formation, limited liability, taxation and operation of the LLC are broadly similar.

Formation

To form an LLC, prospective members must first file articles of organization with their state’s secretary of state. Articles of organization usually detail the LLC’s name, its address and the names of the members. The name of an LLC should not be similar to that of any other existing business that is registered in the state. Most states offer an online name-search facility to check for potential similarities in names.

Limited Liability

The liability of a member of an LLC is, in almost all cases, limited to the amount of that member's investment in the company, so creditors of the LLC can sue individual members personally only for an amount up to the total that each member has contributed to the company. A few exceptions to this rule apply, such as when a member has personally guaranteed a loan to a creditor.

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Taxation

The IRS does not recognize an LLC as a taxable entity and the business can elect its own business entity classification. If the LLC has more than two members, it can choose to be taxed as either a corporation or a partnership. An LLC with only one member can elect to be taxed as a corporation or as a sole proprietor. Members of an LLC pay tax only on the profits that they receive through the business. In certain circumstances, members may transfer some of their profit back to the company and reduce their tax liability. Members of an LLC should seek advice from a tax professional regarding their individual circumstances.

Operating an LLC

One of the main advantages of an LLC is its operational flexibility. The majority of LLCs have an operating agreement that sets out the internal rules for managing the company. The complexity of these rules varies according to the size and nature of the business of the LLC. Unless the operating agreement states otherwise, all members can play a part in managing the company. Members may be either individuals or other business entities.

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References

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