Purpose of LLC: Everything You Need to Know
The purpose of an LLC, or a limited liability company, is to shield the business owner from personal liability for the company's debts. 3 min read
Forming an LLC
The purpose of an LLC, or a limited liability company, is to shield the business owner from personal liability for the company's debts. Most states allow residents, individuals who live outside the state or country, other LLCs, corporations, pension plans, and trusts to serve as LLC owners.
To form an LLC, you typically need to file Articles of Organization with the office of the Secretary of State where you plan to establish the business. This document requires the official name of your business, which will become the legal name of the LLC. Before filing your Articles of Organization, search to make sure another business in the state doesn't already have a similar name. If your name could be confused with that of another business, your filing will be rejected.
You'll also need to file a statement of the company's purpose along with a list of owners (called members) and their names and addresses. Indicate whether the LLC's purpose is time-limited, such as a specific project, or intended to exist in perpetuity. The specific language required in Articles of Organization and related documents varies by state. Only some states require LLCs to file an official operating agreement. However, having this document in writing gives you clarity about operating procedures and related details.
Definition of LLC
An LLC is a business entity that provides its members protection from:
- Business liability
- Tax advantages
- A few governance restrictions.
An LLC combines the flexibility of a partnership with the limited liability of a corporation. Because the IRS does not recognize LLCs as tax entities, LLC members can choose how the business is treated for taxation.
Purpose of an LLC
An LLC allows business owners to avoid double taxation by filing business income on their individual tax return, while also providing limited liability. This entity also allows you official business status in your state without adherence to rigid corporate regulations. You can establish a small business and enjoy its advantages without the high costs of creating a corporation.
Common LLC requirements include:
- A registered agent who is physically in the same state as the incorporation. This person or business is responsible for receiving legal papers on behalf of the LLC and must be available during normal business hours. Many LLCs choose a professional agency to provide this and other compliance-related services.
- An organizer is a person or business responsible for filing the LLC's Articles of Organization.
- This document must include the organizer's name, address, and signature.
General Purpose Statement
If you use a general purpose statement, it will include boilerplate language such as, "The purpose of this LLC is to legally and lawfully operate as a corporation in New Jersey." This statement indicates the LLC's willingness to comply with the state's taxation laws, operational regulations, and business guidelines in exchange for limited personal liability.
Specific Purpose Statement
Not all states require a specific statement of purpose. However, some companies choose to delineate their mission statement in detail. This should indicate the time frame of the mission if applicable. If the mission of the LLC notably changes, new articles must be filed.
Nonprofit Purpose Statement
In some states, a nonprofit organization can organize as an LLC. For these groups to qualify for federal tax-exempt status, the statement of purpose must indicate a mission that is:
LLCs are designed to provide flexible management, governed by agreement rather than bylaws. New LLC owners should draft an operating agreement to detail how the business will be managed and the procedures in place to prevent disputes. Some states provide a default operating agreement that is used if the LLC does not create one.
The LLC structure primarily exists to protect its owners and managers from liability. Not only does liability protect your personal assets, but it attracts investors who would otherwise be reluctant to provide venture capital. Otherwise, they could risk losing more than their investment in the event of a lawsuit or insolvency. This liability protection does not extend to criminal actions by LLC members. Liability protection also ensures that any debt the business accrues does not become personal debt.
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