What Is A Limited Liability Company?

A Limited Liability Company (LLC) is one of the more flexible business forms and is therefore a popular choice for sole proprietors looking to form a legal entity. LLCs provide limited liability protection to their owners (called members). Typically, owners are not personally responsible for business debts and liabilities of the company so creditors cannot pursue owners’ personal assets to pay business debts.

Advantages of an LLC

Business owners stand to gain many benefits when they register a company as an LLC. These benefits are, in many cases, unavailable to sole proprietorships and general partnerships. Creating an LLC typically provides the business owner with the following advantages:

  • Limited liability protection. Owners are not held personally responsible for business debts and liabilities.
  • Pass-through taxation. Typically LLCs do not pay taxes at the business level. Income/loss is reported on the owners’ personal tax returns and any tax due is paid at the individual level.
  • No ownership restrictions. LLCs do not face restrictions on the number or type of owners.
  • Flexible management. Owners have flexibility in structuring company management.
  • Fewer ongoing formalities. LLCs have less annual paperwork than, and do not face the meeting requirements imposed on C corporations and S corporations.
  • Credibility. LLCs may be perceived as a more legitimate business than a sole proprietorship or general partnership.
  • Consent to add owners. Written consent of LLC members must be obtained prior to increasing ownership in the company or adding new owners.

First, the owners of an LLC are afforded limited liability, like shareholders of a corporation. Second, the business can be taxed as a corporation or as a partnership, giving the members some choice in how the income should be taxed. Finally, an LLC can be member-managed or manager-managed. In member-managed LLCs, each member has the power to bind the company. In manager-managed LLCs, only a manager or authorized officer can bind the company. In either case, individual members will not be personally liable for the debts, obligations and liabilities of the LLC, provided the LLC is properly formed and operated. This is an important point. Simply forming an LLC doesn't automatically provide that corporate shield. If you are, for example, paying your personal expenses out of the business bank account, or you don't even have a business bank account, someone suing your company can and most likely will argue that you are not treating the business as a separate entity and they should be permitted to “pierce the corporate veil” and reach your personal assets. It is of utmost importance that you observe the proper operating procedures of any corporation to ensure the corporate shield remains intact.

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