Limited Liability Company Definition: Everything You Need to Know
The limited liability company definition, also known as an “LLC,” is a distinct legal body separate from its owners, members or shareholders.3 min read
2. Protections of a Corporation
3. Flexibility of a Partnership
4. Advantages of an LLC
5. Disadvantages of an LLC
6. How Do LLCs Compare to Other Business Entities?
Limited Liability Company Definition
The limited liability company definition, also known as an “LLC,” is a distinct legal body separate from its owners, members or shareholders. This means that these groups of people cannot be held personally liable for anything the business does, including its debts or liabilities. Depending on the laws of the state where the LLC is located, an individual member may be a single person, a partnership, a corporation or another LLC. All 50 states, plus Washington, D.C. recognize limited liability companies.
A limited liability company:
- Receives its own tax ID number
- Can open its own bank account
- Can conduct business under its name
- Articles of Organization must also be filed with the Secretary of State
A limited liability company has the benefit of acting like a corporation while still maintaining some of the characteristics of a partnership. For example, the limited liability company will receive flow-through taxation to its owners similar to partnerships, yet is still afforded certain liability protections similar to corporations.
In order to form a limited liability company, the owner or owners must choose a name and register it with the Secretary of State. You must then file Articles of Incorporation, choose your officers and members, and decide on how many owners will run the business. In the majority of states, any type of company can form an LLC. However, some states require the LLC to have at least two owners or members.
Once the initial procedural steps are done, you must apply for a business license and a federal employer identification number. These forms can be found on the IRS website. While not required, it is highly recommended that the LLC create an operating agreement, which specifically states the rights and responsibilities of the owners. Once your LLC is registered, a limited liability company is required to add the letters “LLC” to its business name.
Protections of a Corporation
One of the sole reasons why businesses choose to incorporate as an LLC is to limit the owners’ personal liability. However, in certain circumstances, creditors may be able to “pierce the corporate veil,” or reach the personal assets of a member in cases of fraud or when legal requirements have not been met.
Flexibility of a Partnership
As stated above, limited liability companies take on some of the same characteristics as partnerships. Even if you’re limited liability company only consists of one member, or even if it is hundreds of employees, the limited liability company structure protects each member. One of the key differences between a partnership and a limited liability company is the fact that the LLC is distinguishable from its owners and members, and their personal assets are protected.
Advantages of an LLC
A limited liability company is much simpler to set up than a corporation and also provides it members more protection flexibility. While it definitely takes some research, and planning to start an LLC, it allows the business’s assets to be protected from any liability. It provides security and allows each partner to acquire their earned payouts. LLCs can also attract investors because it is more legitimate than a non-incorporated business.
Disadvantages of an LLC
While there are many advantages of forming a limited liability company, there are also a few disadvantages. For example, there is an inherent limit on how much growth the company can achieve. Shares cannot be issued to investors, which limits the amount of interest in the company. For this reason, it might not be a wise choice to form a limited liability company if its owners or members may want to pursue it as a publicly listed company in the future.
A limited liability company can also not last beyond the death of its owner, or bankruptcy of its members. With a corporation, even upon these events happening it can still last forever. Different states have different rules for limited liability companies, which results in them being treated differently in each state.
In regard to a limited liability companies, members might also be subject to self-employment tax on its earnings.
How Do LLCs Compare to Other Business Entities?
If you have questions about whether an LLC is right for you, it's smart to find a lawyer.
Since the LLC is a relatively new legal form for businesses, federal and state governments are still looking at ways to tighten regulations concerning them.
If you need help with forming a limited liability company, you can post your legal need on UpCounsel’s marketplace.UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.