Examples of LLCs vary depending on where they do business, how they are taxed, and the number of members they have. A limited liability company (LLC) has certain characteristics.

  • It is a business entity that combines the simplicity of a sole proprietorship or partnership with the limited liability protection of a corporation. With an LLC, you pay taxes at the member level and not the entity level. An LLC also provides its members with limited liability protection.
  • You can create an LLC with one owner, two or more owners, a corporation, or another LLC.
  • In most circumstances, an LLC's creditors cannot place a claim against member assets to satisfy company debt.
  • Unlike an S corporation, an LLC can have an unlimited number of shareholders.

Exceptions to Limitation of Liability

Like corporate shareholders, there are limits to LLC member protection. Here are a few conditions where a member risks personal liability:

  • A member personally guarantees a business debt.
  • A member causes personal harm to someone.
  • A member withholds taxes from an employee's check and does not deposit the funds.
  • A member commits fraud, breaks the law, or recklessly harms the company or a person.

An LLC's Liability for Member's Personal Debts

In general, a member's creditor cannot confiscate LLC-owned assets to satisfy a member's personal debt. Notwithstanding, there are situations where a member's actions cause vulnerability to company assets. Here are some cases:

  • A court can issue a Charging Order so that a creditor receives the member's profits until the debt is satisfied.
  • A creditor can foreclose on the member's ownership in the business to pay off the member's personal debt.
  • A creditor a can get a court order to dissolve the LLC structure. The company will have to liquidate its assets, and the member's profit would go to the creditor to pay off the debt.

Single-Member LLC Protection

Single-member LLCs are more vulnerable than multi-member LLCs. In a multi-member LLC, charging order protection applies to the LLC members not associated with the debt collection activity. Therefore, in the case of a single-member LLC, there is no need for a Charging Order.

Maintaining the LLC As a Separate Business Entity

You risk your LLC status if the courts cannot distinguish between you and your LLC. To protect your LLC status:

  • Obey the law and run a fair, ethical business.
  • Make sure your business has enough money in its accounts to pay for normal operating expenses and liabilities.
  • Keep personal and business finances and transactions separate. Use your LLC's EIN when conducting business matters.
  • Create an operating agreement and honor it in your business practices.

Foreign Versus Domestic Limited Liability Company

An LLC is either a domestic limited liability company or a foreign limited liability company. A domestic limited liability company is created and operated in the same state. Conversely, a foreign limited liability company is created in one state and operated in a different state. While most states do not have a particular name for domestic limited liability companies, they do have a designation for foreign limited liability companies.

Limited Liability Company Taxes

Since the IRS considers LLCs pass-through companies, LLC members must include their portion of profits and losses on their individual tax returns. Each LLC member must make quarterly deposits based on the estimated amount they owe.

Tracking Income

When receiving your share of the company profits, write a check on your behalf from the LLC's account. This will help you keep your business account in order.

Business Write-offs

Your business receives tax breaks that you personally cannot receive. For instance, you cannot deduct your car expenses on your tax return. However, if your business owns a car and it depreciates each year, that amounts are deducted, which lowers the net income. When you get your portion of the profits, it excludes that expense.

Lawsuits and Accidents

As an entrepreneur, you risk your family's security when you open a business, and rightfully so, you want to protect the personal assets you accumulate. An LLC business structure protects your personal assets from any claims against your company.

An LLC status provides you with limited liability protection. Familiarize yourself with the advantages, disadvantages, and risks associated with an LLC structure.

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