Author: Brenton McWilliams
What is a Limited Liability Company?
A limited liability company or LLC is a business entity created by state law. Limited liability companies are similar to corporations such as the companies traded by stockholders on Wall Street. However, the rules for limited liability companies are much more flexible allowing the complexity of individual LLCs to be easily adapted to fit the needs of each business. For example, a start-up LLC with a single member could be created with complete authority vested in the single owner and minimal reporting requirements. A more complex business with multiple owners could design its LLC with a board of directors, executive officers and non-voting economic interest owners.
Limited liability companies also offer flexibility in taxation. The IRS classifies a single-member LLC as a disregarded entity and treats it as a sole proprietorship for income taxes. An LLC with multiple members is treated as a partnership by default with a share of the income passed through to each individual member for reporting on their personal income tax return. In some circumstances, a limited liability company can also make an election to be taxed as either a C-corporation or an S-corporation.
At the simplest level, a limited liability company is an ownership contract establishing a course of dealing among the owners of a business. Well drafted formation documents specify the rights between the owners including management of the business, decision making procedures, investment requirements and rights to share in the income from the business.
A limited liability company has roles similar to a corporation but with different terminology. Rather than being called owners or shareholders, the owners of an LLC are referred to as members. The members don’t own shares of the LLC. Instead, they own membership interests.
Beyond the dealings between the owners, the LLC is treated similar to a person when dealing with outside parties. The LLC can enter into contracts in its own name, sue other individuals and businesses and be sued by other individuals or businesses. The LLC is treated as an entity separate from its owners. After an owner places assets or property in an LLC, the owner no longer owns the assets or property. Instead, the owner owns an interest in a limited liability company that owns the assets or property. Subject to some limitations, the owners are not personally subject to liabilities incurred by the LLC.
If you’re considering forming an LLC, making changes to an existing LLC or if you need legal advice for your business, please call me at (251) 215-9275 or write me on the contact page to discuss how I can help.