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.
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The owners are called "members." There
are no shareholders in an LLC.
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One or more members
have to be designated to organize a limited liability
company (LLC).
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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.
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Limited liability
companies are fairly new.
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A limited liability
company has the tax advantages of a partnership and
the limited liability advantages of a corporation.
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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:
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Acquire all necessary
local, state, and federal licenses and permits.
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File articles of
organization with the Secretary of State.
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Pay the filing fees.
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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.
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Designate a registered
agent and a registered office, and file the designation
with the Secretary of State.
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Prepare and adopt
an operating agreement.
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File an annual report
with the Secretary of State.
Taxation of a
Limited Liability Company
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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.
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Properly structured,
it is taxed like a partnership or an S corporation.
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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.)
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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:
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:
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The time specified
for dissolution in the articles of organization or
a written operating agreement.
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The happening of
an event specified in the articles of organization
or written operating agreement.
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The written consent
of all members.
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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.
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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:
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File articles of dissolution
with the Secretary of State.
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Wind up the business.
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Pay all debts, taxes,
and claims against the business.
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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.
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