A limited liability company ("LLC") is a form of business organization that combines the limited liability benefits of a corporation with management and tax structures of a partnership. 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 applied to corporations. By 1991, every state had passed a statute allowing the creation of LLCs.
"Limited liability" simply means that the members of the LLC generally cannot be held personally liable for the debts and actions of the business. This means that the personal assets of the members of the LLC are generally protected from any creditor or legal claims made against the LLC. However, even limited liability does not shield owners from their own negligence.
Business owners and organizations concerned with potential lawsuits or debts that could arise in the business, should consider forming an LLC. Forming your business as an LLC can provide security for your personal assets if the business struggles financially or is involved in lawsuits.
Not all businesses can be formed as an LLC. Businesses that operate in certain industries such as: banking, trust, and insurance cannot be organized as an LLC. Some states such as California, prohibit even more industries from forming as an LLC. To find out if your business can be formed as an LLC check with the Secretary of State or consult a business attorney.
You can form an LLC by filing “articles of incorporation" with your state's Secretary of State Office and pay the required filing fee. Generally, fill-in-the-blank articles of incorporation can be obtained from the on the Secretary of State website or requested through the mail. A few states require you to publish in the local newspaper your intention to form an LLC and prepare an operating agreement.
Both LLCs and limited partnerships provide limited liability for their members/partners, however, there is a key difference in their organizational structure. LLCs shield all members (owners) from personal liability for actions taken by the business. In addition, members can actively participate in the day-to-day management of the business without losing their limited liability protection.
Limited partnerships also shield its limited partners (owners) from the liability of the actions of the business. However, a limited partnership must have at least one general partner that is personally liable for the actions of the partnership. Only general partners can actively participate in the daily management of the partnership. If a limited partner participates in the daily management of the partnership they risk losing their limited liability protection.
Choosing the correct legal formation for your business is a complicated question and can have serious financial, tax, and organizational implications. A skilled business attorney can help you understand the potential pros and cons of organizing your business as an LLC. In addition, a lawyer can help you fulfill the requirements and file any paperwork required to form your business as an LLC.
Last Modified: 06-27-2017 12:59 AM PDTLaw Library Disclaimer
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