What Does Limited Liability Mean?
A Limited liability company, more commonly known as LLC, is a business structure. The term is basically self-explanatory: The owners of a limited liability company are limited as to what they are financially responsible for if the business goes into debt. There is no minimum or maximum number of members needed to form a LLC. In fact, an individual business owner can create a limited liability company.
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Considerations
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A limited liability company should not be confused with a corporation or partnership. The proprietors of a limited liability company are referred to as "members" as opposed to partners or shareholders. Even though this business structure is not a partnership or a corporation, a limited liability combines features of both entities.
Benefits
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There are certain perks to being the proprietor of a limited liability company because you will operate similar to a corporation. LLC's are considered a separate business entity, however, you will only be financial responsible for debt if the debt has been signed with a personal guarantee. LLC's have "flow through taxation," meaning you will avoid double taxation because any profits and losses flow through the company to each individual proprietor. In contrast to a corporation, LLC's are not required to have business meetings, keep minutes or document any of the resolutions. In addition, LLC's are not required to split the profits down the middle. Rather, LLC owners can choose the way they want to distribute company profits.
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Misconceptions
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If you want to be a limited liability company but desire to go public with your company someday, you will be more successful by opting for a corporation business structure. Also, if you have a lot of members, an LLC may not be right for you because if one of the members passes away or is faced with bankruptcy, the LLC will be dissolved. However, a corporation business structure would be allowed to continue operating under those circumstances.
Warning
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There are a few types of businesses that are not allowed to become an LLC, such as insurance companies and financial institutions.
Functioning
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Even though limited liability companies are a fairly new business structure, they can be created in any state. However, the rules are different for each state. In most cases, you are required to file "articles of organization" with the secretary of state. You may also want to create an operating agreement that outlines how your company intends to distribute profits, ownership and ownership changes. (See Resources.)
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