A limited liability company ("LLC") is a form of business organization that combines the limited liability benefits of a corporation with the management and tax structures of a partnership. The term "limited liability" simply means that the members of an 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. This means that LLC members who act negligently may still face liability for their actions.
A major benefit of forming an LLC is the ability to avoid the double tax applied to corporations. As such, business owners and organizations concerned with potential lawsuits or debts that could arise 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.
Keep in mind that not all businesses can be formed as an LLC. For example, businesses that operate in certain industries such as banking, trust and insurance cannot be organized as an LLC. Some states may also prohibit more industries from forming as an LLC.
As such, if you are considering forming an LLC you must check with the Secretary of State or consult a business attorney to determine if that is possible under your state’s laws.
While the details may vary amongst each state, you generally need to follow these steps in order to legally form an LLC:
- Designate who will be members of the LLC;
- Create business name that is not already in use in your state;
- File “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;
- Some states require you to publish your intention to form an LLC in the local newspaper. You may also be required to prepare an operating agreement about how the business will run and the roles for each LLC member; and
- Obtain the proper licenses and permits that your LLC will need to operate.
There are many different types of business forms that you can choose to utilize. There are also many details and rules that apply to each one, which can vary between the states. Below are some other common business forms and a brief overview of how they differ from LLCs:
- Limited Partnership: One similar business form to an LLC is a limited partnership. 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.
- Corporation: A corporation is another commonly used business form that differs on many levels from an LLC. First, a corporation is a completely separate entity. This means that the corporation itself can act as an individual unit separate from the owners and managers. Decisions about the company are usually made by a board of directors comprised of the corporation’s shareholders.
- Just like an LLC, the shareholder’s personal assets are protected since the corporation is a separate entity. Creditors and individuals suing the corporation can only turn to the business assets to collect payment. This provides a greater level of individual protection from liability.
- Sole Proprietorship: In this model, one individual owns the business and is personally responsible for all legal obligations and debts. Thus, a sole proprietorship provides much less individual protection and holds more risk than an LLC. However, this type of business is easy to form and gives the individual more control over business decisions and operations.
Choosing the correct legal formation for your business is a complicated process 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, an attorney can help you fulfill the requirements and file any paperwork required to form your business as an LLC.