LLC Responsibilities: Everything You Need to Know
LLC responsibilities must be followed in order to maintain the entity's advantages over other forms of business, such as corporations or sole proprietorships. 3 min read updated on February 01, 2023
LLC responsibilities must be followed in order to maintain the entity's advantages over other forms of business, such as corporations or sole proprietorships. It is a separate entity from its owners, a trait it shares with corporations. Unlike corporations, though, the LLC does not pay its own taxes. The profits and losses pass through to the business owners.
Limited Liability for Members
LLC stands for “limited liability company,” not “corporation.” Forming an LLC and running it requires less complicated procedures and paperwork than corporations require. It still protects owners from liability for claims and debts the business incurs. Creditors cannot seize the personal property of LLC members such as houses or vehicles.
There are situations in which members are held responsible, however:
- The member personally signed for the company's debt by taking a second mortgage, using personal assets as loan collateral, or using a personal credit card.
- The member personally injures someone.
- The member does not deposit employee withholdings.
- The member engages in fraud, illegal activities, or reckless behavior.
- The member acts as though the LLC is an extension of themselves instead of keeping it as a separate entity.
In order to prevent this from happening, owners need to follow certain guidelines:
- Keep the activities of the LLC separate from your own business activities, or a court might rule that the LLC is invalid.
- Be honest in your dealings with all vendors and creditors.
- Make sure you keep enough cash invested in the business to meet all of the LLC's expected expenses.
- Get a federal Employer Identification Number.
- Open a checking account for your business and use it for business only, never intermingling business and personal finances.
- Create an operating agreement, which can help your LLC seem more credible.
Advantages of LLCs
Although S corporations and LLCs have many similarities such as liability protection, LLCs have many advantages over S corporations. S corporations can only have one class of stock for their shareholders; LLCs do not have this restriction. S corporations cannot have more than 75 shareholders, and all must be U.S. residents. LLCs can have an unlimited number of owners including foreign investors.
In a limited partnership, the partners cannot use business losses to offset their income if they have a passive role in the business. However, if they are active in the management of the business, they are liable for any debt the business incurs. LLC owners do not have liability for debt and can still use losses as tax deductions.
Unfortunately, there are disadvantages as well, most notably the difficulty in transferring ownership. Since it is difficult to transfer ownership of an LLC, a corporation is a better entity for large companies because corporations can transfer stock in the stock exchanges. In smaller businesses, this may not be an issue.
How to Form an LLC
To form a new LLC, you need to file articles of organization with the state department that handles LLCs. It is usually the same department that deals with corporations, and part of the Secretary of State office. Filing fees vary by state.
The articles of organization can be filed on a one-page form supplied by the state. It asks for a few details about the LLC such as its name and address, and the contact information for the appointed registered agent. Depending upon the state, you may need to supply additional information such as the names and address of all the members of the LLC.
An operating agreement is another necessity of forming an LLC. It does not need to be filed with the state, but it is highly suggested that you have one.
How to Dissolve an LLC
The procedure for ending your LLC depends upon the operating agreement. Unless the operating agreement covers it, the state law requires that the company dissolve if a member decides to leave the LLC. The members need to wrap up any outstanding obligations and debts. They must then divide assets and profits assets and profits among the members and at that point decide if they want to start a new LLC with the members that remain.
Although LLCs do provide liability protection to their owners, it is not absolute, and you should have an insurance policy to further shield your assets. If the court does not allow the limited liability status when the company is sued, insurance policies should protect you against catastrophic loss. It can also protect the LLC's assets from claims and litigation.
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