Meaning Of LLC: Everything You Need to Know
Understanding the meaning of LLC can be an important step in determining which of the available business structures are right for your company.3 min read
2. Partnership vs LLC
3. How Does an LLC Protect You?
Understanding the meaning of LLC can be an important step in determining which of the available business structures are right for your company.
What Is a 'Limited Liability Company - LLC'
An LLC, or Limited Liability Company, is a business structure that provides a company's owners, otherwise known as members, a certain level of liability protection. In simple terms, members of an LLC can't be held personally responsible for the company's legal or financial obligations. In essence, an LLC is a mix between the characteristics found in the corporation and partnership or sole proprietorship business structures.
The main feature that attracts business owners to this particular structure is the limited liability feature that is similar to the level of protection a corporation offers its owners. In addition to this feature, the LLC business structure also adopts the pass-through taxation features of the partnership business structure. Although limited liability companies have a number of interesting advantages, there are also some disadvantages you'll want to be aware of when considering this particular structure for your own business, such as:
- The company must be dissolved in the event of a member's death
- The company must dissolve in the event that a member declares bankruptcy
- The LLC structure does not have the ability to become publicly listed or traded
The main reason that most business owners select the LLC structure is to provide themselves with a measure of liability protection. In essence, this protects the owner's personal assets in the event that legal or financial action is taken against the company. LLCs are typically regarded as a mix between the partnership, a simple business structure with two or more owners legally bound by a written agreement, and the corporation, a structure that provides limited liability protection for the company's owners.
Although the LLC aims for the simplicity of a partnership, it is a more formal business structure that requires certain documents, such as the company's Articles of Organization, to be filed at your local Secretary of State. However, because the LLC is a simpler structure it is much easier to establish than a corporation. Additionally, the LLC business structure allows for much greater flexibility than a corporation without sacrificing the limited liability protection that many business owners are interested in.
While the LLC provides a certain measure of liability protection for its members, creditors may be able to work around this if there is evidence of fraud or the company fails to meet certain legal and reporting requirements with the state in which it operates. Unless the company has a Business Continuation Agreement, the company may be forced to dissolve under circumstances such as:
- A member chooses to leave the company
- A member passes away
- A member files for bankruptcy
To make sure the business is able to continue to operate or to allow sale or transfer of the company, it's a good idea to have a Business Continuation Agreement in place.
Similar to a corporation, an LLC is considered to be a completely separate legal entity from its members. This allows the company to do things like obtain its own tax identification number, open bank accounts, and conduct business in its own name, rather than the name of its owners.
Partnership vs LLC
The main difference between an LLC and a partnership is that the LLC business structure separates the assets of the company from those of the company's members. This essentially protects members from the company's debts or legal obligations. An LLC is similar to a partnership in the way that profits are taxed on the members' personal tax returns. It is possible to offset other income by reporting business losses, but this can only be claimed up to the member's initial investment in the company. LLCs are only required to file what is known as an informative tax return.
How Does an LLC Protect You?
One of the biggest advantages of organizing your company as an LLC is the limited liability features the structure offers. This means that, under normal circumstances, you are not held personally responsible for any of your company's financial or legal obligations. If, for example, your company files bankruptcy you and any other members will not be expected to cover the company's debts with your own financial assets under normal circumstances. Creditors are generally not able to target the members or their personal assets for payment because their financial agreements were made with the company and not its members.
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