A Limited Liability Company (LLC), just like a corporation, offers protection from personal liability for business debts. But, unlike a corporation, which pays its own taxes, an LLC is a pass-through tax entity in which the profits and losses pass-through its owners who report it on their personal tax returns.
How to Form an LLC
- File “Articles of Organization” with your state government including the name, address, and phone number of the business, and the name of the person who is the “registered agent” of the company. Depending on the state, the names of all LLC members are sometimes requested.
- Create a written LLC operating agreement. This is a crucial document because it includes the rights and responsibilities of the LLC members. It can also include the percentage interest and the shares of profits of the members.
Main Features of an LLC
Limited Personal Liability
All LLC members are spared from personal liability for business claims and debts. A creditor cannot go after them and demand payment from their personal assets. The assets of the LLC are used to pay off debts, and the only thing members stand to lose is their investment in the business.
Exceptions to Limited Personal Liability
Limited personal liability can be enjoyed by an LLC when doing business transactions, but this protection is not fixed. This particular downside also applies to corporations. An LLC owner can be held liable if he/she:
- Intentionally does something fraudulent, illegal, or reckless that causes harm to the company or to someone else.
- Fails to pay taxes withheld from employees’ wages.
- Personally and directly injures someone.
- Personally guarantees a bank loan or a business debt on which the LLC defaults.
- Treats the LLC as an extension of his/her personal affairs rather than as a separate legal entity.
Your personal assets can be protected by good liability insurance which is not possible with a limited liability protection. If you are practicing your craft and accidentally injure someone, your liability insurance policy will cover you. In the event of a court proceeding, your insurance can protect your personal assets if the limited liability status is disregarded by the court.
An LLC is a “pass-through” entity where the business income passes through the business to the LLC members who will report their share of profits or losses on their individual income tax returns. All LLC members make a quarterly estimated tax payment to the IRS.
Member management means participating equally in the management of business. Manager management refers to designating one or more owners, or even outsiders, to take responsibility for managing the LLC. In a manager-managed LLC, only those named “manager” can vote with regards to management decisions and act as an agent of the LLC.
Ending an LLC
Depending on the laws of your state, or as indicated in the operating agreement, when one member leaves, the LLC dissolves. The remaining members will be responsible for meeting the business obligations left behind, pay the debts, and divide the remaining assets and profits among themselves. The decision to create a new LLC with the remaining members can be discussed. In order to avoid this kind of abrupt ending, your LLC operating agreement can include a “buy-sell” or “buyout” clause with guidelines on what will happen if a member decides to leave to pursue other interests, retires, or dies.
Source: 1-2-Law: https://www.12law.com