Understanding the basics of a limited liability company (LLC)

There are three primary structures for a business, sole proprietorship, partnership and corporation. However, there is a fourth option called a limited liability company, or sometimes referred to as a legal liability corporation.

Understanding the basics of an LLC is relatively straightforward, however, the structure is anything but simple.

Image credit: Pixabay

How is the LLC structured?

Limited liability structures emerged as a way to fill the deficiencies that partnerships and corporations possess with a structure that would be more advantageous while offering the best of each of the other two kinds of business structures.

The LLC option can be likened to a hybrid structure, while it's not really a partnership or a corporation, but it does contain attributes from each. That being said, it is not a corporation or a partnership. LLCs are usually governed by an operating agreement, which is similar to a partnership agreement, and sets the rights and responsibilities of all members. This way it is clear which member is responsible for what capital investments, who gets distributions and how issues such as profits, losses and dissolution will be handled. The agreement is not a state-filed document, but rather an internal one to help set the conditions on how the company will be governed.

Why LLC?

There are many reasons why an individual, or group of individuals, may want to form an LLC instead of a corporation or a partnership. This structure is most often usually chosen because of the beneficial tax advantages that come with being an LLC. LLCs have a higher degree of flexibility because they are not confined to the same rules and laws that are required when corporations are formed. Limited liability companies are able to skip formal meetings, recording of minutes and do not have to have bylaws drawn up in relationship to the corporation type of business structure.

In addition to the tax benefits, LLC business owners' can enjoy no personal liability if the business falls into debt, is a party in a lawsuit, or has other financial disasters. With the LLC, the business owners' personal assets are protected from being seized or used to pay off financial obligations.

How many owners?

The number of owners in an LLC can vary - the ownership can range from one member to multiple owners. The one thing to remember is if a person establishes the LLC business as a single owner, they must claim the business on their personal income tax form and will be considered a sole proprietorship for tax consideration. A single owner may want to carefully weigh out the pros and cons of becoming a limited liability corporation before filing the paperwork.

It is important to note that owners cannot transfer or sell their interest in the company as stock would be sold in a corporation. Instead, the owner wishing to sell cannot do so since it is contingent on the acceptance of the other members. This may be a disadvantage for some to consider before forming an LLC.

In the United States. a business can be established as a limited liability company. Laws from states may vary and, when considering an LLC, the individual laws should be carefully examined to determine whether or not the LLC is the right choice for structured business organization.