Limited Liability Company or LLC is what you will get when you
combine the attributes of both corporations and partnerships. So
this is like corporation's protection from personal liability for
business debts and the pass-through tax structure of partnerships
and sole proprietorships put together.
While setting up an LLC is more difficult than creating a
partnership, or sole proprietorship, running one is considerably
easier than running a corporation.
What are the main features of LLC?
Limited Personal Liability. As with shareholders of a
corporation, all LLC owners are protected from personal liability
for business debts and claims.
This means that if the business itself cannot pay a creditor,
such as a supplier, a lender, or a landlord, the creditor cannot
legally come after any LLC member's house, car, or other personal
possessions. Since only LLC assets are used to pay off business
debts, the owners will only lose the money that they have
invested in the LLC.
However there are some exceptions to limited liability.
It is important to realize that this protection for personal
liability for the business transactions is not absolute. An LLC
owner can be held personally liable if he or she: personally
injures someone, guarantees a loan or business debt, fails to
deposit taxes from employee’s wages, intentionally does something
fraudulent or clearly wrong-headed that causes harm to the
company or to someone else and treats the LLC as an extension of
his or her personal dealings, rather than as a separate legal
entity.
Business Insurance. A good liability insurance policy can shield
your personal assets when limited liability protection does not.
Insurance can also protect your personal assets in the event that
your limited liability status is ignored by a court.
In addition to protecting your personal assets in worst
situations, insurance can protect your corporate assets from
lawsuits and claims. However, commercial insurance usually does
not protect personal or corporate assets from unpaid business
debts, whether or not they are personally guaranteed.
LLC Taxes. Unlike a corporation, an LLC is not considered
separate from its owners for tax purposes. Instead, it is what
the IRS calls a "pass-through entity," a partnership or sole
proprietorship.
This means that business income passes through the business to
the LLC members, who report their share of profits, and losses,
on their individual income tax returns. Each LLC member must make
quarterly estimated tax payments to the IRS.
LLC Management. The owners of most small LLCs participate equally
in the management of their business. This arrangement is called
member management.
The alternative management structure means that you can designate
one or more owner to take responsibility for managing the LLC.
The non-managing owners simply sit back and share in the LLC
profits.
In a manager-managed LLC, only the named managers get to vote on
management decisions and act as agents of the LLC. Choosing
manager management, however, can complicate securities issues for
your LLC.
How do you form an LLC?
To create an LLC, begin filing articles of organization with the
LLC division of your state government. This office is oftentimes
in the same department as the corporations division, which is
usually part of the secretary of state's office. Filing fees are
$100 or less.
After that, you can now form an LLC with just one person in every
state. There is no maximum number of owners that an LLC can have.
But for practical reasons, you probably would want to keep the
group small. An LLC that is actively owned and operated by more
than about five people risks problems with maintaining good
communication and reaching agreement among the owners.
Your LLC must fulfill the same local registration requirements as
any new business, such as applying for a business license and
registering a fictitious or assumed business name.
How do you end it?
When one member wants to leave the LLC, the company dissolves.
This is based upon the laws of many states, or unless your
operating agreement says otherwise. If this is the case, the LLC
members must fulfill any remaining business obligations, pay off
all debts, divide any assets and profits among themselves, and
then decide whether they want to start a new LLC to continue the
business.
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