Role of Limited Liability Corporations
Limited liability companies (LLCs) came into existence as a business entity during the 1990s. An LLC blends certain features of a corporation with that of a general partnership. According to the IRS website, LLCs appear as a popular business structure because members have limited liability for company debts, as in a corporation, while enjoying flexible taxation and management structures.
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Membership
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Owners of an LLC are referred to as members of the LLC. Members of an LLC may include corporations, foreign entities, other LLCs and individuals, as provided by the IRS website. An LLC may have an unlimited number of members. Many states allow a single person to operate as the lone member of an LLC. As indicated on the IRS website, banks and insurance companies appear prohibited from forming an LLC.
Articles of Organization
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All states require businesses to file articles of organization or a certificate of formation as a condition of forming an LLC within a state. Articles of organization include information such as the name and location of the business, as well as the name and address of a person or business responsible for accepting legal process on behalf of an LLC. In most cases, articles of organization will be filed with the secretary of state's office. Most states have fill-in the blank articles of organization that can be printed online, or obtained personally from the Secretary of State's office. The fee to file articles of organization varies from state to state.
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Liability
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Perhaps the biggest advantage business owners gain by forming an LLC concerns personal asset protection. LLC members have the same personal asset protection afforded shareholders of a corporation. Business creditors of an LLC may not pursue the personal assets of LLC members in an attempt to recover business debts. Furthermore, personal creditors of LLC members can't pursue the business interests of an LLC member in an attempt to recover a personal obligation. The exception to this occurs if an LLC member agrees to guarantee a loan, as indicated on the Lectlaw website.
Taxation
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The IRS website indicates an LLC may elect to be taxed as a sole proprietorship, corporation or partnership. Very rarely will an LLC opt for taxation as a corporation, unless the LLC members plan to retain the greater majority of company profits in the business. LLCs that elect taxation as a corporation appear subject to double taxation. This means the LLC will pay taxes as a company, and distributions from the company to LLC members will be taxed on their individual tax returns. In most instances, LLCs elect taxation as a partnership or sole proprietor. This feature allows LLC members to bypass federal taxation, by passing their share of business profits and losses to their individual tax return. Certain states require LLCs to pay state or franchise taxes on income, regardless of the tax election taken.
Management
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LLC members have the ability to choose the management structure that will run the company. LLCs may operate as a member-managed or manager-managed company. Member-managed LLCs allow the members of the company to take responsibility for the day-to-day operations of the company. Manager-managed LLCs allow non-member managers to take charge of running the company on a day-to-day basis.
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