Limited Liability Companies Overview
Evolution of the Limited Liability Company:
Limited Liability Companies (LLCs) have become popular in recent years because of their attractive benefits, such as limited liability for members and pass through taxation. The concept of the LLC is relatively new, but has its roots in an 1892 German law. This law was based on the early English business practice of private limited companies, and the 1874 Pennsylvania law that established limited liability partnerships. These statutes formed precedent for subsequent laws made in the United States. LLC formation mostly took place in Germany, France, and South American countries until Wyoming became the first US state to enact LLC legislation in 1977. Now all fifty states have some kind of LLC rules and regulations. In 1988, the Internal Revenue Service (IRS) announced that it would tax LLCs in a similar manner to partnerships. This pass through taxation made the LLC an even more attractive option to business owners.
Nature of an Limited Liability Company:
An LLC is a type of business formation that combines certain aspects of a corporation and a partnership. It offers members limited liability. This means that the members will not be personally liable for the company's debt. An LLC member stands to lose only the amount of money that he or she invested into the business. However, this limited liability will only be held if the member shows that the LLC is not in anyway an extension of his or her personal assets. The LLC corporation must be kept a separate business entity. It is beneficial to create an operating agreement when forming an LLC. This will detail the rights and responsibilities of the members, their duties, and the percentage of the company that each member owns. This is important in avoiding controversy and conflict that can arise from an LLC's relatively flexible management structure.
Limited Liability Company Formation:
In order to form an LLC, members must file the appropriate paperwork, pay filing fees, choose a business name, and form an operating agreement. This can all be done with the aid of a business attorney, or can be done on one's own at the state secretary's corporations office. The business name must be original and cannot contain certain words that are restricted by the state. The paperwork, usually called the articles of organization, will require the business name, address, and the names of its members. The operating agreement will detail the rights, responsibilities, and duties of all the members. It is important to create this document, although it is not always required by state law. An LLC operating agreement will include the percentage of ownership that each member maintains. Fees must be paid to file this paperwork, which is usually between $100-$800.
Jurisdictional Requirements of an Limited Liability Company:
When members form an LLC, they should be aware of the specific rules and requirements that exist in their jurisdiction. Sometimes an LLC may be conducting business within the borders of more than one state. This means the LLC may have to meet certain requirements. This is only in the case of intrastate operations. This means that an LLC has its headquarters in one state, but may have a warehouse or other building in another state where they are manufacturing products. In this case, they will have to qualify to do business in both states. This includes filing paperwork and paying filing fees, similar to those which are required in an LLC formation. Members should also be aware of tax legislation. Although most states allow for pass-through taxation, there may be certain restrictions depending on the jurisdiction.
Advantages of an Limited Liability Company:
The main advantages to forming an LLC over a corporation are the limited liability the business form offers, and the tax advantages. Forming an LLC avoid the "double taxation" problem, because the LLC itself will not be taxed. The income of the business will be taxed as part of the partners' personal income. This is referred to as pass-through taxation. Members of an LLC will have limited liability within the company. The members will not be liable for any debt that is acquired by the company, because they stand to lose only the amount of money that they have invested. If the LLC is sued, the plaintiff only has the right to take action against the company itself, not the members' personal assets. LLCs also allow more flexibility in ownership. There is less in the way of record keeping and paperwork maintenance when running an LLC, as opposed to a corporation.
Disadvantages of an Limited Liability Company:
Despite the advantages of owning an LLC, there are several disadvantages. There is a limited amount of legislation that govern the rules and regulations of owning an LLC, as opposed to a corporation. Although this may be an advantage to some, the flexible structure of LLCs can prove to be confusing and lead to conflict. This is why it is so important to have an LLC agreement that will specify the rights and responsibilities of each member. Due to the fact that LLCs do not have stock, the process of transferring shares in the LLC can be more complicated. Some jurisdictions may levy an extra tax on LLCs. This can be thought of as a fee that is paid to maintain the limited liability aspect of the LLC. Forming an LLC can sometimes be costly, because it involves paying filing fees, and, sometimes, publishing a letter of intent in a local newspaper.
Management of an Limited Liability Company:
LLCs are generally easier to manage than corporations, because there are less rules and regulations governing their structure. They are not required to have a Board of Directors or annual meetings. Sometimes this can lead to some confusion within the management structure which is why it is important to have an operating agreement. This will specify which members are responsible for specific tasks, and who will have the final say when making management decisions. There is generally two ways in which an LLC is managed: member managed or manager managed. Commonly, LLCs will be managed by one of all of the members. The members may appoint one members to handle most of the managing tasks. Sometimes, an LLC will hire an outside manager to handle these responsibilities. Managers must handle the taxes, renew licenses, and maintain the legal separateness of the LLC.
Operations of an Limited Liability Company:
Creating an operating agreement is a major necessity in forming an LLC, because it will outline the rights, responsibilities, and duties of all the members. The document will specify the percentage of the company that each member owns, as well as how the profits and losses will be allocated. If there is conflict between the members of the LLC and there is no operating agreement, then the members can be subject to the default rules of the state. This can be a disadvantage to the members. The agreement should also include voting rights, and other procedures for making important decisions within the business. These agreements can be created on one's own using blank forms, or with the aid of a business law attorney.