LLC Laws: Everything You Need to Know
LLC laws are established by each state to govern the formation and establishment of a business entity known as a limited liability company. 3 min read
2. How Is an LLC Formed?
3. Does My LLC Need an Operating Agreement?
4. How Does Establishing an LLC Affect Liability?
LLC laws are established by each state to govern the formation and establishment of a business entity known as a limited liability company. An LLC is a separate legal entity from the business owner and can do business, open a bank account, and pay taxes individually. Business owners often opt to form an LLC to enjoy limited liability protection, along with beneficial pass-through taxation. An LLC can have one or many owners, referred to as members.
Who Can Form an LLC?
This business entity is best suited for those who:
- Are engaged in any activity that increases the risk of their business being sued or accruing large amounts of debt
- Have substantial personal assets that they want to shield from business liability
Certain business types are ineligible to create an LLC. While the specific prohibitions vary by state, they often include banking, insurance, trusts, and professionals such as lawyers, doctors, accountants, and architects. Check the laws in your state before submitting your LLC registration forms.
How Is an LLC Formed?
Most states require four simple steps to form an LLC, although laws may vary in your location.
- First, choose a name for your LLC that isn't already used by another business in your state. You should also follow the specific naming guidelines in your state.
- File articles of organization and pay the required fee.
- Create an operating agreement that details the management of the LLC, including rights, responsibilities, and ownership percentages of all members.
- In some states, you need to publish a notice about the formation of your LLC in a local newspaper as designated by the secretary of state.
Does My LLC Need an Operating Agreement?
In most states, an LLC operating agreement is not legally required, but it's a good idea to create one if your LLC has more than one member. This legally binding document dictates rules for profit and loss percentages, establishes member voting rights, and describes the procedures for meetings and other important operations. Having an LLC operating agreement in place can also help establish the existence of your business with the court if your limited liability comes into question. If you do not have an operating agreement in place, the business will be subject to default state rules if member disagreements arise.
How Does Establishing an LLC Affect Liability?
Limited liability protection means that members are not personally responsible for the LLC's financial obligations and debts. This means that their personal assets are protected from legal judgments and creditor actions. However, the extent of this protection varies by state and by circumstance. Before establishing an LLC, it's important to understand how this business entity will affect:
- Personal liability for business debts
- Personal liability for the actions of other members or employees in the course of doing business
- Personal liability for your own business-related actions
- Business liability for the personal debts of its members
With a limited liability company, you will not be personally liable for the debts of the business. This means that if the business is sued or pursued by creditors, your personal assets and bank accounts are safe. The exception is if you personally guarantee a business loan or credit card, a step sometimes required by creditors who don't want to be out of luck if your business closes.
If other members or employees commit wrongdoing in the course of doing business, you will not be held responsible. Although the involved members and the LLC itself may be found liable for their actions, members who were not involved in the illegal or negligent actions will not be personally liable.
All states hold LLC owners personally liable for wrongdoing they commit while doing business. This can include instances where a member injures someone due to negligence, does not deposit taxes taken out of employee wages, intentionally harms an individual or the company through an illegal or reckless action, or mixes personal and business affairs or accounts.
Personal debts of members cannot be satisfied by seizing LLC assets. However, a creditor of an LLC member can order the court to have the LLC pay the debt, foreclosing on the member's ownership interest in the LLC, and/or request that the LLC be dissolved by the court.
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