Limited Liabilities Companies (LLC)

A limited liability company (LLC) is a corporate structure in the United States whereby the owners
are not personally liable for the company's debts or liabilities. It is a hybrid entity that combines
the characteristics of a corporation with those of a partnership or sole proprietorship. The limited
liability feature is similar to that of a corporation; the availability of flow-through taxation to the
members of an LLC is a feature of partnerships. A Limited Liability Company (LLC) in plain terms
means a legally registered business entity which is limited by shares. Limited liability implies that
all the shareholders are accountable for all debts which the company incurs. The liability of the
business partner is limited to the amount of money which they've invested in the company. This is
a popular business structure that provides the benefits of both a partnership and a corporation.
This lesson explains the benefits of limited liability companies. An LLC provides its owners with
corporate-like protection against personal liability. It is, however, usually treated as a non-
corporate business organization for tax purposes.

Many companies are structured as limited liability companies, or LLCs. The LLC is a newer
business structure that provides several benefits to its members. LLCs are governed by the
individual states and are recognized in all states. They are organized by filing with the appropriate
state government office, though state laws regarding LLCs vary. The owners of the company are
referred to as members. An LLC can usually be started with just one member, and there's no
upper limit on the number of members an LLC may have. Unlike limited partners, LLC members
can fully participate in everyday business operations while still enjoying limited liability. In most
cases, an LLC is formed where two or more business individuals come together and form a
partnership. That is to say, they get to run the business as co-owners.

This is a relatively new form of business compared to corporations. For a while many states did
not recognize LLCs as legitimate business entities. Today most states have special rules for
limited liability companies that allow owners a few different benefits. For examples, LLC owners,
usually called members, are protected with limited liability just like if they were shareholders in a
corporation. Third parties cannot attack owners’ personal assets because of this protection. Also,
members can participate directly in the management of the company. This means each member
can vote on issues and will have a say in how the day-to-day operations are carried out. Unlike
corporations, on the other hand, LLCs do not pay taxes directly. In this way, it is treated more as
a partnership than a corporation. The members themselves are responsible for the income taxes
of the company because the revenue flows through the company to the individual investors based
on their ownership share .But as you can see; the company structure is really the best of both
worlds. It has all the major benefits of a corporation without the technical and tedious downsides.
At the same time, it avoids the double taxation that C corporations have when trying to distribute
profits to their owners. LLCs avoid this by allowing the profits to flow directly to the owners without
having to pay a separate dividend tax.
History

The LLC is a relatively new business form in the United States, although it has existed in other
countries for some time. In 1977, Wyoming became the first state to enact LLC legislation: it
wanted to attract capital and created the statute specifically for a Texas oil company (W.S. 1977 §
17-15-101 et seq., Laws 1977, ch. 158 § 1). Florida followed with its own LLC statute in 1982
(West's F.S.A. § 608.401, Laws 1982, c. 82-177 § 2). At this point states had little incentive to
form an LLC because it remained unclear whether the internal revenue service (IRS) would treat
an LLC as a partnership or as a corporation for tax purposes.

In 1988, the IRS issued a ruling that an LLC in Wyoming would be treated as a partnership for tax
purposes. This allowed the taxable profits and losses of an LLC to flow through to the LLC's
individual owners; unlike a typical corporation, an LLC would not be taxed as a separate business
organization. After the 1988 IRS ruling, nearly every state in the United States enacted an LLC
statute, and the LLC now is a widely recognized business form. Many legal issues concerning the
LLC are still developing, however.

In 1995, the commissioners on uniform laws approved the Uniform Limited Liability Company Act.
It was amended in 1996. Unlike other uniform acts related to business entities, such as the
Uniform Partnership Act, the uniform law governing LLCs has not been influential. As of 2003,
only eight states and the U.S. Virgin Islands had adopted the uniform law; the remaining states
have drafted their own laws.

Formation
State law governs the creation of an LLC. Persons form an LLC by filing required documents with
the appropriate state authority, usually the secretary of state. Most states require the filing
of ARTICLES OF ORGANIZATION. These are considered public documents and are similar to
articles of incorporation, which establish a corporation as a legal entity. The LLC usually comes
into existence on the same day the articles of organization are filed and a filing fee is paid to the
secretary of state.

The minimum information required for the articles of organization varies from state to state.
Generally, it includes the name of the LLC, the name of the person organizing the LLC, the
duration of the LLC, and the name of the LLC's registered agent. Some states require additional
information, such as the LLC's business purpose and details about the LLC's membership and
management structure. In all states an LLC's name must include words or phrases that identify it
as a limited liability company. These may be the specific words Limited Liability Company or one
of various abbreviations of those words, such as LLC or Ltd. Liability Co.

Structure

The owners of an LLC are called members and are similar in some respects to shareholders of a
corporation. A member can be a natural person, a corporation, a partnership, or another legal
association or entity. Unlike corporations, which may be formed by only one shareholder, LLCs in
most states must be formed and managed by two or more members. LLCs are therefore
unavailable to sole proprietors. In addition, unlike some closely held, or S, corporations, which are
allowed a limited number of shareholders, LLCs may have any number of members beyond one.

Generally, state law outlines the required governing structure of an LLC. In most states members
may manage an LLC directly or delegate management responsibility to one or more managers.
Managers of an LLC are usually elected or appointed by the members. Some LLCs may have
one, two, or more managers. Like a general partner in a limited partnership or an officer in a
corporation, an LLC's manager is responsible for the day-to-day management of the business.

A manager owes a duty of loyalty and care to the LLC. Unless the members consent, a manager
may not use LLC property for personal benefit and may not compete with the LLC's business. In
addition, a manager may not engage in self-dealing or usurp an LLC's business opportunities,
unless the members consent to a transaction involving such activity after being fully informed of
the manager's interest.

Operating Agreement

Nearly every LLC maintains a separate written or oral operating agreement, which is generally
defined as the agreement between the members that governs the affairs of the LLC. Some states
call an operating agreement regulations or a member control agreement. Although some states
do not require an operating agreement, nearly all LLCs create and maintain a written document
that details their management structure.

The operating agreement typically provides the procedures for admitting new members, outlines
the status of the LLC upon a member's withdrawal, and outlines the procedures for dissolution of
the LLC. Unless state law restricts the contents of an operating agreement, members of an LLC
are free to structure the agreement as they see fit. An LLC can usually amend or repeal
provisions of its operating agreement by a vote of its members.

Membership Interests

A member of an LLC possesses a membership interest, which usually includes only an economic
interest. A membership interest is considered personal property and may be freely transferred to
nonmembers or to other members. The membership interest usually does not include any right to
participate in the management of the LLC. Accordingly, if a member assigns or sells a
membership interest to another person, that other person typically receives only the right to the
assigning member's share of profits in the LLC. Persons who receive a membership interest are
not able to participate as voting members or managers unless they are admitted as new
members.

Member Contributions

Members of an LLC contribute capital to the LLC in exchange for a membership interest. There is
no minimum amount of capital contribution, and members usually can contribute cash, property,
or services. By default, the total amount of a member's capital contribution to an LLC determines
the member's voting and financial rights in the LLC. In other words, unless an LLC's operating
agreement provides for a different arrangement, the profits and losses of the LLC are shared
proportionally in relation to the members' contributions to the LLC. For example, if a member's
capital contributions constitute 40 percent of an LLC's capital, that member typically has a 40
percent stake in the LLC and has more voting power than a member with a 20 percent interest.

A member may promise a future contribution to an LLC in exchange for a membership interest. If
the member later fails to make the contribution, the LLC generally may enforce the promise as a
contract or sell the member's existing interest to remedy the failure.

Distributions of profits or assets to members are usually governed by an LLC's operating

agreement. Most state LLC laws do not require distributions to members other than when a
member withdraws or terminates membership. Members vote to determine all aspects of
distributions to members, including amount and timing. Because a member's share of any
distribution or loss depends on the member's share of all capital contributions to an LLC, the LLC
maintains records of each member's capital contribution.

Liability

State LLC statutes specifically provide that members of an LLC are not personally liable for the
LLC's debts and obligations. This limited liability is similar to the liability protection for corporate
shareholders, partners in a limited partnership, and partners in a limited liability partnership.
Under certain circumstances, however, a member may become personally liable for an LLC's
debts.

An individual member is generally personally liable for his or her own torts and for any contractual
obligations entered into on behalf of the member and not on behalf of an LLC. In addition, a
member is personally liable to a third person if the member personally guarantees a debt or
obligation to the third person. A person who incurs debts and obligations on behalf of the LLC
prior to the LLC's formation is jointly and severally liable with the LLC for those debts and
obligations.

Members may also become personally liable for an LLC's debts or obligations under the
"piercing-the-corporate-veil" theory. This doctrine imposes personal liability upon corporate
shareholders and applies primarily if a corporation is undercapitalized, fails to follow corporate
formalities, or engages in fraud. Although the law of LLCs is still developing, piercing the
corporate veil is likely applicable to an LLC that fails to follow the legal formalities required to
manage the LLC. LLC statutes in Colorado, Illinois, and Minnesota specifically apply the
corporate veil-piercing theory to LLCs.

A member is generally considered an agent of an LLC and thus may bind the LLC for the debts
and obligations of the business. When a member has apparent or actual authority and acts on
behalf of an LLC while carrying on the usual business of the LLC, the member binds the LLC. If a
third person knows that the member is not authorized to act on behalf of the LLC, the LLC is
generally not liable for the member's unauthorized acts. Some states also limit a member's
authority to act as an agent of an LLC.

Records and Books

Many LLC statutes require an LLC to maintain sufficient books and records of its business and
management affairs. This requirement varies from state to state. The books and records
generally detail the members' contributions to the LLC, the LLC's financial and tax data, and other
financial and management information. Like a partnership's books, an LLC's books generally
must be kept at the LLC's principal place of business, and each member must have access to
and must be allowed to inspect and copy the books upon reasonable demand.

Taxation

Prior to 1997, the IRS generally treated an LLC as a partnership for federal income tax purposes.
If an LLC is taxed as a partnership, its members are taxed only on their share of the LLC profits.
Any gains, losses, credits, and deductions flow through the LLC to the members, who report them
as income and losses on their personal tax return.

The IRS developed a system for determining whether an LLC was formed more like a corporation
or more like a partnership. Under prior regulations, if the IRS determined that the LLC's operation
was more similar to a corporation, the LLC is taxed as a corporation, meaning that both the LLC
and its members were taxed. Specifically, the IRS observed whether the LLC had such
characteristics as limited liability, centralized management, free transferability of interests, and
continuity of life.

However, the IRS passed regulations in 1996, effective in 1997, that allowed LLC members to
elect whether the company is a corporation or a partnership for taxation purposes, 26 C.F.R. §
301.7701-3 (2002). The regulations, known as "check-the-box" regulations, generally freed LLC
owners from worrying about whether their method of operation would require them to pay
corporate taxes instead of partnership taxes. Accordingly, many LLCs may operate similar to a
corporation (centralized management with member owners), yet the members may enjoy taxes
that flow through the entity.

Member Withdrawal

Members may withdraw from an LLC unless the operating agreement or articles of organization
limit their ability to do so. A member must usually provide to the LLC written notice that he or she
intends to withdraw. If a withdrawal violates the operating agreement, the withdrawing member
may be liable to the other members or the LLC for damages associated with it. State law
frequently sets forth the circumstances under which a member may withdraw from an LLC. In
many states a member may withdraw only if he or she provides six months' written notice of the
intent to withdraw. In a few states, an LLC cannot prevent a member's withdrawal.

A member who withdraws is usually entitled to a return of his capital contribution to an LLC,
unless the withdrawal is unauthorized. Some LLCs instead pay a withdrawing member the fair
market value of his or her membership interest. The operating agreement typically provides for
the method and manner of payment of a withdrawing member's interest. State law also governs
those issues.

Dissolution

Dissolution means the legal end of an LLC's existence. In most states an LLC legally dissolves
upon the death, disability, withdrawal, bankruptcy, or expulsion of a member. These occurrences
are generally called disassociations. Other circumstances that bring about dissolution include
bankruptcy of the LLC, a court order, or the fulfillment of the LLC's stated period of duration.

Most states provide for the continuation of an LLC after the disassociation or withdrawal of a
member. Continuation after a member's disassociation usually requires the remaining members'
unanimous consent. Some states require that the articles of organization or operating agreement
allow for the continuation of the business after a member's disassociation. Some states allow an
LLC's articles of organization or operating agreement to require the continuation of the business
after a member's dissociation even if the remaining members do not provide unanimous consent.

If an LLC dissolves, state law and the LLC's operating agreement usually outline the process for
winding up the LLC's business. In this process the LLC pays off its remaining creditors and
distributes any remaining assets to its members. The LLC's creditors receive priority. Although
members may be creditors, they are not creditors in determining the members' distributive shares
of any remaining assets. After the LLC pays off its creditors, and only then, it distributes the
remaining assets to its members, either in proportion to the members' shares of profits or under
some other arrangement outlined in the operating agreement. After an LLC winds up its business,
most states require it to file articles of dissolution.
Advantages of Limited Liability

 Avoiding Double Taxation

 Flexibility of Income Distribution

 Simplicity

 No Ownership Restrictions

 Member Involvement in the Company

 Attractive to Foreign Investors

Disadvantages of Limited Liability

 Newness

 Interstate Business More Complicated

 No Perpetual Existence

 Exclusions

 Cost

CREATING AN LLC

It is important that the organizer(s) of a prospective LLC follow the "enabling statutes" or
formation laws of the state in which the company will be formed in order to be designated as an
LLC. Without this designation, the company will lack the protection of limited liability and will be
treated as a general partnership. Therefore, the first step in creating an LLC is to find out your
state's specific enabling statutes.

The organizer does not have to be one of the company's members. The organizer's function is to
file the articles of organization, a task which can be accomplished by a lawyer, a hired agent from
a service company specializing in such business, or a manager of the prospective company.

Naming an LLC

Before forming an LLC, the company name must be reserved with the secretary of state or its
equivalent. Most states require that the words "Limited Liability Company" or the abbreviation
"LLC" be included in the name of the company. In some states, "Limited Company" or "LC" is the
preferred designation. In all states, however, the name of the LLC must not resemble the name of
any other corporation, LLC, partnership, or sole proprietorship that is registered with the state.

Filing the Articles of Organization

This comes after choosing the most suitable Company name. Articles of Organization are more or
less the same as Articles of association. What follows is the payment of a filing fee to the relevant
authorities in your state. Articles of Organization bear all the important information about the LLC.
This includes the company's physical address, its name, and the filing agency.

I must use a registered agent. The name and address of the registered agent must appear on the
Articles of Organization. There ought to be a brief explanation of the kind of products or services
which the LLC intends to deal in. It must be captured together with the specific date which the
Company wishes to start off its operations

Draft an LLC Operating Agreement

This legal document creates the parameters which will govern the LLC. It works to meet the
needs similar to those of Articles of Incorporation which govern a Corporation. In other words, it
lays out the rights and obligations of each business partner. Hence, it's a meeting of the minds
which means, it's drafted in the presence of each member.

On the other hand, the contents in an operating agreement may vary depending on several
considerations. More often than not, the document contains the following information;

 Amount invested by each member in the LLC

 How the profits will be split among the investors
 Organizational structure in terms of power, roles, and responsibilities
 The number of members
 Tax considerations

Obtain all the necessary licenses

All requisite permits are part and parcel of setting up a Limited Liability Company. One must
make tax registration if at all the LLC intends to get involved in any form of a commercial
transaction or working with employees. It's important to know when exactly the taxes should be
paid to avoid heavy penalties due to late payments.

Types of LLC's

In addition to the common basic LLC type, there are two other types of LLC's you need to know
about:

A Professional LLC (PLLC) is an LLC set up and owned by specific types of professionals.
Typically medical professionals, accountants, engineers, and architects can form a PLLC. The list
of professionals varies by state.

A Series LLC is a type of LLC that has a main LLC and other separate LLC's within it. They are
segregated for liability purposes. Series LLC's are often used for real estate holdings, with each
LLC in the series owning a different property.