So what does LLC mean?
The first of the limited liability entities to be introduced into the United States, and currently the most prevalent, is the limited liability company. The limited liability company (LLC) is a type of non corporate entity that offers many of the benefits of both partnerships and corporations.
Limited Liability Company Defined
The limited liability company (LLC) is a non-corporate entity that offers limited personal liability to its owners. It is somewhat of a cross between a partnership and a corporation. The LLC is owned by members who either manage the company directly or delegate management responsibility to managers or officers.
Like a corporation, the owners of a limited liability company are usually not liable for company debts and obligations. Like a partnership, the LLC’s income and losses are allocated to the owners who then pay tax on the limited liability income and profits allocated to them.
Limited Liability Company Characteristics
The limited liability company is an unincorporated entity based on the concept of freedom of contract. It is a legal entity distinct from its owners. The owners of a limited liability company are generally referred to as its members.
The characteristics of any limited liability company will depend on its members’ objectives and the statutes of the state in which it is formed. However, most limited liability companies have common characteristics, including limited liability, flexible management, continuity of life, restricted transferability of interest, unrestricted ownership, certain formalities for formation, and partnership taxation status.
LIMITED LIABILITY
Like a corporation, the owners of a limited liability company typically have no personal liability for the debts and obligations of the company.
MANAGEMENT
Management of the limited liability company is very flexible. All members of the limited liability company are granted the right to manage its business unless otherwise provided for in the limited liability company’s articles of organization.
State statutes typically permit the owners of a limited liability company to allocate management authority among its members in any manner they choose. They may decide to be managed by one individual, by committee, or by the majority of the owners.
Most limited liability companies appoint a board of managers, similar to a corporation’s board of directors. A written agreement among the members, referred to as an operating agreement, sets forth the details concerning the management of the limited liability company.
Major decisions of a limited liability company are usually made by the members holding a majority of the limited liability company interest, unless otherwise provided for in the operating agreement or by statute.
CONTINUITY OF LIFE
The statutes of most states provide that a limited liability company may be designed for continuity. Unless the articles of organization provide that the limited liability company will be a term company that will dissolve on a certain future date or event, the limited liability company will be an entity at will, meaning that it exists indefinitely, until the members dissolve it.
The statutes of some states, however, require that the articles of organization filed with the state must specify a period of duration for the limited liability company.
The death or dissociation of one or more of the members of a limited liability company does not necessarily cause the dissolution of the limited liability company. The statutes of some states provide that the members of a limited liability company must give six months’ notice of their intent to dissociate from the company.
TRANSFERABILITY OF INTEREST
State statutes place restrictions on the transfer of the ownership interest of the members of limited liability companies. Many of these restrictions may be modified by the company’s operating agreement.
Members of a limited liability company are not considered to be co-owners of the company’s property. That property is owned by the limited liability company itself. A member may usually transfer or assign his or her right to receive distributions to another person.
This transfer does not necessarily make the new owner of the right to receive distributions a member of the limited liability company. The transferee of a member’s financial rights to a limited liability company does not have the same rights to participate in the management and operation of the limited liability company that members do.
A person may become a member of a limited liability company only if he or she is substituted, or admitted, to the limited liability company as provided by the company’s articles of organization.
OWNERSHIP
There are very few restrictions on the number or type of owners who may own limited liability companies. Most state statutes provide that a limited liability company may be formed by one or more persons. That definition of persons usually includes corporations, partnerships, trusts, and other entities.
FORMALITIES OF ORGANIZATION
The limited liability company is formed in much the same way that the limited partnership or business corporation is formed. Articles of organization are filed with the secretary of state or other appropriate state authority.
In addition, a limited liability company may be subject to annual reporting requirements imposed by the state in which it was organized.
TAXATION
One of the most important benefits to forming a limited liability company is the partnership taxation status, which is preferable to corporation taxation for most members.
In 1997, the Internal Revenue Service adopted Check the Box regulations,1 which make it simple for a limited liability company to be taxed as a partnership. When the members of a limited liability company file an income tax return for the LLC it is classified, by default, as a partnership.
If the members prefer, they can simply check the box on an election form and elect to be taxed as a corporation. Single-member limited liability companies are disregarded as entities separate from their owners for federal income taxation purposes unless the sole member elects to be taxed as a corporation.
Most states follow the federal scheme for limited liability company income taxation. However, some states, especially those that do not have a personal state income tax, may either treat limited liability companies as corporations for income taxation purposes, or they may assess special taxes on limited liability companies.
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