What is LLC
Article by Taleed El-Sabawi
What is LLC
LLC stands for Limited Liability Company. It is a business structure that simply integrates the aspects of both corporations and partnerships. It is said that it combines the best parts of such business partnerships and corporations. To know more about LLC, the following key features will help us understand how it works.
Limited Personal Liability
All LLC owners are protected from personal liability for business debts and claims. It is just like that of a corporation where shareholders cannot be pursued by a creditor such as a supplier, a lender, or a landlord. The creditor cannot legally come after an LLC member’s house, car, or other personal possessions. It is only the money invested in LLC or the LLC assets that a creditor can legally come after but not the LLC owners’ personal assets and possessions. This is often called “limited liability.”
Exceptions to Limited Liability
Though personal assets of LLC owners are protected from business debts and claims, this feature is not absolute. An LLC owner can be held personally liable if he or she:
? personally and directly injures someone? personally guarantees a bank loan or a business debt on which the LLC defaults? fails to deposit taxes withheld from employees’ wages? intentionally does something fraudulent, illegal, or reckless that causes harm to the company or to someone else, or? treats the LLC as an extension of his or her personal affairs, rather than as a separate legal entity.
The last exception given is significant. The owners must treat the LLC as a separate business otherwise the state court might decide that there is not an LLC formed but rather the owners are actually doing personal businesses. This drawback is not only for LLCs but also applied to corporations. Knowing this limitation, the metrics below serve as reminders for co-owners of LLCs.
? Act Fairly and Legally-This is characterized by simply presenting your finances accordingly to the vendors, creditors, and other outsiders.? Fund your LLC adequately. Invest enough cash in the business so that your LLC can meet foreseeable expenses and liabilities.? Keep LLC and personal business separate. Get a federal employer identification number, open up a business-only checking account, and keep your personal finances out of your LLC accounting books.? Create an operating agreement. Having a formal written operating agreement lends credibility to your LLC’s separate existence.
Additional Protection: Business Insurance
As presented in the “Exceptions to Limited Liability” section above, insurance companies can protect the owner of the LLC from lawsuits and claims as long as LLC pays its Bills. This is because commercial insurance usually does not protect personal or corporate assets from unpaid business debts, whether or not they’re personally guaranteed. For instance, if you are a massage therapist and you accidentally injure a client’s back, your liability insurance policy should cover you. Insurance can also protect your personal assets in the event that your limited liability status is ignored by a court.
LLC Taxes
LLC is not considered separate from its owners for tax purposes. It has what IRS called as the “pass- through entity”. It simply means that the LLC members will have to report their share of profits or losses to their individual income tax returns as the income of the business passes through its members.
LLC Management
LLC management runs in the idea that the business has to be managed by the co-owners of the LLC itself. Members are expected to share equally the management of the business.
Forming an LLC
There is a need to file an “articles of organizations” with the LLC division of your state government. In some states it is called a “certificate of organization” or “certificate of formation”.There is a need to only specify a few basic details about your LLC, such as its name and address, and contact information for a person involved with the LLC. Along with this, owners must create a written LLC operating agreement. This is also a crucial document where it specifies the members’ rights and responsibilities, their percentage interests in the business, and their share of the profits.
Ending an LLC
An LLC can be ended when a co-owner will decide to leave LLC. If this scenario will happen, all the members must pay all obligations or taxes to the state. They also must fulfill any obligations, divide any assets and profits among themselves, and then decide whether they want to start a new LLC to continue the business with the remaining members.
With this, the LLC operating agreement can prevent this kind of abrupt ending to your business by including “buy-sell,” or buyout, provisions that set up guidelines for what will happen when one member retires, dies, becomes disabled, or leaves the LLC to pursue other interests.
About the Author
Taleed El-Sabawi is a business law attorney with Kersey and Sabawi, PC, http://www.kerseysabawi.com.
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