Limited Liability Company

A Limited Liability Company, commonly called an "LLC," is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. The LLC is a relatively new concept in the United States. It is neither a corporation nor a partnership nor a sole proprietorship. The owners are called members. The first LLC legislation in the United States was the Limited Liability Company Act of Wyoming in 1977. It failed catch on immediately since the Internal Revenue Service would not give an LLC partnership tax classification so long as the members of the LLC were exempted from personal liability for the company's debts. In 1988 the position changed and since then all 50 states have enacted LLC laws.

An LLC is a separate legal entity like a corporation but it is entitled to be treated as a partnership for tax purposes and therefore carries with it the "flow through" or "transparent" tax benefits that corporations do not have. The members can report business profits or losses on their personal income returns.

An LLC can be set up with even one member. There is no limit on the number of members and the members may be individuals, corporations, or other LLC's. The members can even be foreigners. Admitting a new member is a simple process and there is no limit as to the number of new members.

An LLC exists as a separate entity much like a corporation. Members cannot be held personally liable for debts of the LLC unless they have signed a personal guarantee. LLCs can select varying forms of distribution of profits amongst its members.

Simplicity and flexibility are the hallmarks of LLCs. The LLC business structure requires no corporate minutes or resolutions or meetings and is easier to operate. Members can hire a management group to run the LLC. This group can consist of members, nonmembers, or a combination.

Certain states levy a franchise tax or capital values tax on LLCs. This tax is the "fee" the LLC pays the state for the benefit of limited liability. The tax can be an amount based on revenue, an amount based on profits, or an amount based on the number of owners or the amount of capital employed in the state, or some combination of those factors.

Raising capital may pose a problem for LLCs as investors are more comfortable investing funds in the better-understood corporate form with a view toward an eventual initial public offering.

LLCs have a limited life span and come to an end upon the death of a member unless if there is a consensus among all the other members and it is spelled out in an operating agreement.

Each state has different rules governing the formation of a limited liability company. In most states, LLCs can be formed by simply filing the Articles of Organization with the state's LLC filing office. A filing fee will also need to be paid at the time of filing of the Articles of Organization. Most states provide easy fill in the blank forms which can be obtained by mail or downloaded from the state's website. Certain states have an additional requirement of publishing the intention to form an LLC in a local newspaper prior to filing of the Articles of Organization.

Although not required by law, an LLC operating agreement is usually made and it expressly states the rights and responsibilities of the members and how the business of the LLC is to be managed. In the absence of an operating agreement, the laws of the state of incorporation will govern the working of the LLC.