A limited liability company (LLC) is a business entity. A variety of business entities, or forms, exist in the United States. Other examples of business entities include partnerships, and corporations. Under the law, if someone files a lawsuit against a corporation, and the suit is successful, the corporation pays money out of the corporation’s assets. The individual members’ and owners’ own assets are not “touched.”
This means that the owners of the corporation are not personally liable for the corporation’s debts, or for damages awarded against it in a lawsuit. One of the downsides of a corporation is so-called “double taxation.” This means that corporate profits are first taxed to the corporation as they are earned. These profits are then taxed to shareholders, as capital gains income, when the shareholders receive dividends. A limited liability company offers the advantages of a corporation in that the owners’ individual assets are shielded from creditors and legal claims made against the LLC.
In addition, LLCs, like partnerships, are not taxed at the “entity level.” This means that unlike corporations, they do not pay taxes as an LLC. The only taxes paid are paid by individual members who have earned profit. There are downsides to organizing as an LLC. The liability of LLC structures is such that owners can be sued for their own negligence.
How is a Limited Liability Company Different from Other Business Forms?
LLCs are different in form from other common business entities. Unlike corporations income, LLC income is only taxed once. In other words, the income “passes through” the LLC, and is only taxed at the individual member level. Partnerships, sole proprietorships, and limited partnerships, also have this tax structure. Limited liability companies differ from corporations in terms of ownership structure. LLCs are owned by individuals, while corporations are owned by shareholders.
LLCs differ from both partnerships and sole proprietorships in terms of liability. Partners in a partnership are personally liable for debts incurred by the partnership. These debts include debts incurred by another partner. This means that if a partnership owes money to a creditor, the creditor can “come after” the individuals’ own individual real and personal property to satisfy the debt. LLC owners generally are not personally liable for liabilities or debts incurred by the LLC. This fact allows for LLC owners to manage the business without having to worry about losing their own assets.
Who Should Form a Limited Liability Company?
Individuals who want to own a small business should consider forming an LLC. Forming a LLC protects individual assets, limiting liability to the LLC’s own resources. By forming an LLC, a small business owner, if sued, will not have to pay out of personal assets. Individuals who are interested in forming a business with minimal paperwork and costs should also consider forming an LLC. LLC formation requires filing a document called “articles of organization,” and a fee, with the state.
This fee is typically smaller than the fee required for forming a corporation. LLC formation usually requires less paperwork to be filed with the state, than does corporation formation. In addition, keeping track of LLC income and expenses is relatively easy. Under an LLC, separate tax return filing is not required. Instead, members and managers report income and expenses on an individual tax return.
LLC management can also be fairly simple. An LLC with two or more individuals can develop an operating agreement. In this agreement, the members include details about how the LLC is governed, including how profits will be allocated, and what members’ votes are needed for specific actions. The operating agreement can also address how the LLC may be dissolved, or shut down. The operating agreement may also provide rules for how disputes among LLC members are to be resolved. The operating agreement may address what happens if an LLC member dies or becomes incapacitated.
What is the Process for Forming a Limited Liability Company?
Forming an LLC requires following a series of steps. These include:
- Determining who will be members of the LLC.
- Creating a unique business name.
- Filing the articles of organization. These documents are usually filed with your state’s Secretary of State.
- Filing an operating agreement, if required by state law.
What Requirements Are There In Filing For a LLC?
Many states require that a document called an initial information statement be filed. This statement must be filed within a short period of time (up to 90 days) of the filing of the articles of organization. On the statement, the names and addresses of LLC members and managers must be provided. The LLC must provide a fee to the Secretary of State.
An additional statement of information must then be filed periodically (every one or two years). If any information on the initial statement has changed, the new information should be included in subsequent filings.
Some states require LLCs to pay franchise taxes. Franchise tax returns are filed with the state’s Franchise Tax Board (FTB). LLCs, if they have employees, must also pay state and federal employment taxes. LLCs must also pay unemployment insurance taxes. LLCs must collect and pay sales taxes.
An LLC formation lawyer can advise you as to what formation documents are needed, and how to complete them.
What Does the LLC Protect? What Does It Not Protect?
While the LLC form protects members’ personal assets from a lawsuit, the situation is different if the lawsuit involves a claim of LLC member negligence. If a court determines an LLC member has acted negligently, the member can be individually liable for that negligence. An LLC member is also individually liable for intentional torts.
For example, if an LLC member commits a battery during negotiations with another business entity, the LLC member is individually liable for that battery.
When Would Members of the LLC Be Personally Liable?
The LLC form protects owners from personal liability for wrongdoing committed by other members, during the course of business. If the wrongdoing is committed in the course of business operations, the LLC, not an individual member or owner, is on the hook.
Individual members are personally liable, if they injure someone during the course of business due to negligence, commit fraud in the course of business, and if they steal LLC assets.
To cover the costs of lawsuits alleging negligence, LLCs commonly purchase general liability insurance. This insurance covers the costs of those injuries. Therefore, business assets need not be converted to cash to satisfy a lawsuit judgment. Negligence can be committed by individual managers, members, and employees. In negligence lawsuits, the plaintiffs can seek large sums of money.
If the LLC does not have general liability insurance, and has insufficient assets to pay damages, the LLC may be forced to close. LLCs run by professionals, called professional limited liability companies (PLLCs), should consider purchasing both general liability insurance as well as professional liability insurance. Examples of professional liability insurance include attorney and doctor malpractice insurance.
Do I Need an Attorney to Help Me Form an LLC?
If you are interested in forming an LLC, you should contact a business lawyer. A business lawyer can advise you as to formation and filing requirements. The attorney can also explain tax and insurance requirements that apply to the LLC. A business lawyer can also represent the LLC in legal proceedings.