What Is a Limited Liability Company (LLC)? A limited liability company ("LLC") is defined as a business organization that shares the limited liability benefits of a corporation but the management and tax freedom of a partnership. LLCs are legal entities created only under state law. Limited liability companies grew in popularity during the 1980s in response to demand for an organization that gave limited liability to its members but avoided the double tax regime applied to corporations. By 1991, every state of the Union had passed a statute allowing the creation of LLCs.
Any sole proprietorship or partnership can convert their business to an LLC and protect their personal assets without having to change the way their business income is taxed. What Does It Mean to Have Limited Liability? "Limited liability" simply means that everybody associated with the company is not liable for damages beyond their initial investment and cannot be held vicariously liable. In other words, a person who puts money in an LLC only risks losing the amount of their investment and will not have to pay any more if the company is still in debt. It is a way of limiting the risk of investing in a company. Be warned that even limited liability does not shield owners from negligence liability.
Who Should Form a Limited Liability Company? Business owners and organizations concerned with potential lawsuits or debts that could arise in the business should consider forming an LLC. If you believe that the type of business insurance that you have on your business would not fully protect your assets, an LLC may be a good idea. Not all business has the opportunity to become a LLC. Businesses that operate in banking, trust, and insurance industries are not allowed to form an LLC. Also, in some states such as California, doctors, healthcare workers, accountants, and architects are not allowed to form a LLC for their business.
How Do I Form a Limited Liability Company? You can form a LLC by filing an “articles of incorporation with your States Secretary of State Office and pay the required filing fee. The articles of incorporation are a simple fill-in-the-blank form that is very short and takes a limited amount of time to fill out. This form can be found on the States website or you can request the form by mail. A few states require you to publish in the local newspaper your intention to form a LLC and prepare a LLC operating agreement, however this is not required in all states.
How Is a Limited Liability Company Different from a Limited Partnership? The difference is control. In a limited partnership, the partner has limited liability unless they act in control of the company's actions, in which case they lose their limited liability. In an LLC, liability is limited regardless of participation in control. LLCs and partnerships are the same for taxation purpose. In both types of businesses, the owner of the business must report their business income or losses on their personal tax returns; the business does not have to pay tax on this money.
Do I Need an Attorney Experienced with LLCs? Starting a business is a very difficult but potentially lucrative option. To understand the distinctions and rights that attach to your business and its organization, it is a good idea to discuss your ideas with a business attorney. A lawyer experienced with limited liability companies can help you incorporate your LLC and explain the tax and organizational benefits of the limited liability structure.