DEFINITION OF A LIMITED LIABILITY CORPORATION

A LIMITED LIABILITY CORPORATION is actually the incorrect term for a LIMITED LIABILITY COMPANY (LLC). While some may use the terms interchangeably, there is no legal term LIMITED LIABILITY CORPORATION.

The basic definition of a LIMITED LIABILITY COMPANY (LLC) according to

‘Lectric Law Library’s Lexicon:

A business structure that is a hybrid of a partnership and a corporation. Its owners are shielded from personal liability and all profits and losses pass directly to the owners without taxation of the entity itself.

HISTORY OF A LIMITED LIABILITY COMPANY (LLC)

Limited Liability Companies are a relatively new legal entity in the United States, though they have a long history in Europe. The use of LLC’s started in 1977. It was granted pass-thru tax status by the IRS in 1988. All 50 states now recognize and allow the formation of an LLC.

Basic Characteristics of a Limited Liability Company (LLC).

A limited liability company (LLC) is a business entity created by statute. It has some characteristics of a partnership and some characteristics of a corporation particularly an S corporation.

  • The owners are called “members.” There are no shareholders in an LLC.
  • One or more members have to be designated to organize a limited liability company (LLC).
  • Management of the limited liability company is vested in its managers. Without an agreement to the contrary, all of the members are managers. A written operating agreement may designate one or more of the members as managers.
  • Limited liability companies are fairly new.
  • A limited liability company has the tax advantages of a partnership and the limited liability advantages of a corporation.
  • Although the lack of precedent makes adopting this form of business a little uncertain, experts predict that the limited liability company will soon become the business form of choice for most small businesses.

Formation of a Limited Liability Company

Forming a limited liability company is more complex than forming a partnership, but less complex than forming and operating a corporation. Forming a limited liability company is a formal process. To form a limited liability company, you must do the following:

  • Acquire all necessary local, state, and federal licenses and permits.
  • File articles of organization with the Secretary of State.
  • Pay the filing fees.
  • File an application with the Secretary of State to reserve a limited liability company name. The name must contain the words “limited liability company,” or the abbreviation “LLC” or some combination of words and abbreviations to indicate that the business is a limited liability company.
  • Designate a registered agent and a registered office, and file the designation with the Secretary of State.
  • Prepare and adopt an operating agreement.
  • File an annual report with the Secretary of State.

Taxation of a Limited Liability Company

  • If the limited liability company is structured properly, each member reports his or her share of the profit and loss on his or her individual state and federal income tax returns.
  • Properly structured, it is taxed like a partnership or an S corporation.
  • Generally, members of a limited liability company are self-employed. They must pay self-employment tax and estimated taxes. (Note: The Internal Revenue Service (IRS) has indicated that if the limited liability company has managers, only the managers have to pay self-employment tax. Check with your accountant for more information.)
  • If the limited liability company is not properly structured, it is taxed like a C corporation.

Liability Issues of a Limited Liability Company

In a limited liability company, a member’s legal liability is limited to his or her investment in the business. Generally, a member’s personal assets are not at risk, but a member’s personal assets may be at risk if any of the following occurs:

  • A member personally guarantees a business debt.
  • The form of business is found to be a sham (not properly formed or maintained).
  • A member becomes personally liable as a result of his or her own acts or conduct.

Term of a Limited Liability Company

A limited liability company is dissolved and its affairs must be wound up at or upon the first to occur of the following:

  • The time specified for dissolution in the articles of organization or a written operating agreement.
  • The happening of an event specified in the articles of organization or written operating agreement.
  • The written consent of all members.
  • The withdrawal of a member, unless the remaining members agree to continue the business after a member withdraws. The articles of organization or a written operating agreement should spell out the procedures for continuing the business after a member withdraws.
  • The entry of a court order or administrative order requiring dissolution.

Liquidation: Limited Liability Company

To liquidate a limited liability company, you must do the following:

  • File articles of dissolution with the Secretary of State.
  • Wind up the business.
  • Pay all debts, taxes, and claims against the business.
  • Distribute remaining assets to members.

The above is general information and is for the purpose of education only. It is not meant to provide legal advice to viewers of this webpage. We recommend that you contact your attorney to assist you in determining the suitability of this program for your own particular case.