What is a Limited Liability Company (LLC)?
A limited liability company is a business structure that is sort of like a hybrid of a corporation and a partnership. Owners of an LLC are called members. Profits and losses of the LLC are shared by all the members who own financial interests in the LLC. Because this type of business is more formal than a sole proprietorship, as with the other types of business arrangements, members will need to have a separate bank account under the name of their LLC to make financial transactions. It is more formal, thus, members will also need to have more money up front in order to start this business – there are filing fees that must be paid to the state in order to register an LLC, as well as fees for any additional permits that may be needed.
Advantages of a Limited Liability Company
- As with a partnership, the members of an LLC may determine their respective rights through an agreement. All members must agree to the LLC agreement. This makes the LLC adaptable to many kinds of business relationships and structures.
- As its name suggests, an LLC offers its members the protection of limited liability. An LLC member will not be personally obligated to pay any debt or liability simply by reason of being a member of the LLC. Note, however, that if someone personally performs the action that causes a lawsuit, the LLC will not shield a person from personal liability. For example, suppose you created an LLC for your band that plays blues music in the delta. If, while setting up your equipment at a club, you negligently cause one of your speakers to fall on a customer, the fact that the LLC owns the speaker and that you were going about the business of the LLC when you caused the accident will not shield you from personal liability for any harm you caused. However, the assets of the LLC (for example, a separate bank account that holds any money made by the band during gigs) are not subject to liability, nor could a LLC partner be subject to liability for another partner’s actions. The limited liability provided by an LLC is not different in kind from that provided by a corporation. However, since shareholders of large, public corporations are often not involved with the management of the business, there is usually no possibility that they could be held personally liable for the actions of the corporation.
- Like partnerships, LLCs are not subject to double taxation of income under the corporate tax. In fact, it is even easier to report income from an LLC on one’s federal tax return than it is to report income from a partnership, since members do not need to file a separate schedule. Members can report income from an LLC just as they would report income from a sole proprietorship.
- LLCs are more stable entities than general partnerships, since LLCs do not automatically dissolve upon the death, disability, or withdrawal of a member. Financial interests in an LLC are assignable in whole or in part, however assignees may not participate in the management of the LLC, with certain exceptions.
Disadvantages of a Limited Liability Company
- Similar to partnerships, members must share control and decision-making authority with other members.
- Unless otherwise provided for in the certificate of formation or operating agreement, every member is an agent of the LLC for the purpose of conducting business. It is likely that a member’s acts, including contracting or other conduct carried out in the ordinary course of business, will bind the LLC even if other members do not agree.
- Certain formalities (e.g., keeping financial records and keeping personal and LLC financial money in separate accounts, keeping minutes from meetings for major decisions, etc.), must be observed in order to retain the status of an LLC and keep the protection of limited liability.
An LLC is the entity of choice of most entrepreneurs and small business owners.
A limited liability company is a business structure that is sort of like a hybrid of a corporation and a partnership. Owners of an LLC are called members. Profits and losses of the LLC are shared by all the members who own financial interests in the LLC. Because this type of business is more formal than a sole proprietorship, as with the other types of business arrangements, members will need to have a separate bank account under the name of their LLC to make financial transactions. It is more formal, thus, members will also need to have more money up front in order to start this business – there are filing fees that must be paid to the state in order to register an LLC, as well as fees for any additional permits that may be needed.
