Let’s face it: not many people outside of business or their lawyers understand the term limited liability company. This is why it’s important to know what this legal term means and how it can help your business. LLC stands for limited liability company, and it indicates that the company’s owners are not personally liable for its debts, obligations, and actions. Limited Liability Companies are a type of business entity in the United States. According to bigideasforsmallbusiness.com over 70% of LLCs are partnerships. An LLC is a form of legal organization that is established by a written operating agreement for the administration and management of an individual or group’s business activities. A Limited Liability Company has two components: a common-law person (called an “owner-member”) who owns equity in the corporation, and one or more “members” (also called “general partners”) who have unlimited financial liability for obligations they assume as members.

Limited Liability Company Basics

Like corporations, limited liability companies (LLCs) are legal entities that can be used to organize and manage businesses. There are, however, significant differences between corporations and LLCs. LLCs are created by filing articles of organization with a state’s secretary of state. The articles of organization create a legal “person’s name” that can be used to earn income. The articles also identify the name and address of the business. The articles of organization can also include a limited partnership or a corporation. However, many people choose to form an LLC because of the tax benefits. Limited Liability Company basics: An LLC is a type of business entity. Like corporations, LLCs are the most common type of business entity. An LLC can be formed by filing articles of organization with a state’s secretary of state. Like corporations, LLC members are owners of the LLC. An LLC has two separate parts: one is the members, who are owners, and the other is the manager, who is a member who has been designated. The manager manages the business and acts as a conduit for creditors of the LLC.

What is a Limited Liability Company?

A Limited Liability Company (LLC) is a type of business entity organized under state law that combines the best aspects of a partnership and a corporation. Like corporations, LLCs are artificially created legal entities, but they are more like partnerships in that they are not subject to the same set of legal rules and regulations. Unlike corporations, LLCs are not required to file articles of organization or have any formal management structure such as a board of directors. Unlike partnerships, LLCs do not have any specific legal rules and regulations governing their operations and are not required to comply with any specific standards or guidelines. In most states, an LLC is simply a type of business entity that can be used to form a new business entity. Some of the benefits of an LLC include a lower tax rate than a corporation and the ability to pass on wealth to heirs without paying federal estate taxes. One of the major disadvantages of an LLC is that an LLC’s managers do not have any form of personal liability for the LLC’s debts and obligations. Like corporations, this means that the managers are potentially exposed to unlimited liability for the LLC’s actions and debts. An LLC can also be formed by filing articles of organization with a state’s secretary of state. The articles of organization create a legal “person’s name” that can be used to earn income. The articles also identify the name and address of the business.

The Three Types of LLCs

As noted above, an LLC can be created as either a general or limited liability company. However, there are other types of LLCs that a state may recognize. These other types of LLCs include an operating or nonoperating company, a professional or trade company, or a for-profit or not-for-profit company. Generally, an operating company is a general LLC that sells products or provides services to customers. An operating company is also called a business entity that conducts regular business activities. A nonoperating company is a general LLC that does not sell any products or provide services to customers, but rather owns assets such as real estate, stocks, or bonds. A nonoperating LLC is also referred to as a holding company. A not-for-profit company is a type of LLC that is formed to operate as a non-profit organization. A for-profit company is a general LLC that is formed to operate as a for-profit company.

How to Form a Limited Liability Company

The state where you want to establish an LLC determines the specific steps necessary to form an LLC in that state. For example, if you want to form an LLC in California, you must file articles of organization with the California secretary of state’s office. As with any business formation process, the first step to forming an LLC is to identify your business’s purpose and desired business model. Once you have defined your business’s purpose and desired business model, you can identify potential business names and LLC formation articles of organization. You can form an LLC by filing Articles of Organization with a state’s secretary of state. The articles of organization create a legal “person’s name” that can be used to earn income. The articles also identify the name and address of the business. Like corporations, LLCs are formed under state law. Therefore, the articles of organization must be filed with the state’s secretary of state’s office. After the articles of organization are filed, an LLC’s operating agreements (formal management and governance rules) must be drafted. An operating agreement is a legal contract that sets out the rules of operation for a limited liability company.

Advantages of LLCs

  • Tax Advantages: The IRS allows businesses organized as LLCs to take tax deductions for interest and income earned on investments, as well as for some business expenses. Corporations, on the other hand, can only take these deductions for the money invested in the business.
  • Flexibility: The fact that an LLC is not subject to for-profit or not-for-profit standards provides flexibility for many businesses. For example, if a business model or industry model changes, the LLC can easily be converted to a different business type such as a corporation.

Disadvantages of LLCs

  • Limited Liability: Limited Liability protects the manager of an LLC from unlimited personal liability for the LLC’s debts and obligations. Any member of an LLC is, in turn, protected from unlimited personal liability for the LLC’s debts and obligations.
  • Taxation: Unlike corporations, LLCs are not treated as “business entities” for federal tax purposes. Instead, they are “income tax entities.” This means that LLC profits are reported on individual income tax forms and taxed like “pass-through” income, such as wages and salaries. LLCs should not be used as a tax avoidance strategy.
  • Formality: Unlike corporations, LLCs are not “artificially created legal entities.” This means that LLCs do not require any significant amount of formal documentation such as articles of incorporation, a business plan, bylaws, or directors’ and officers’ meeting minutes.

Key Takeaway

As you can see, LLCs are a flexible type of business entity that can be created by filing articles of organization with a state’s secretary of state. An LLC can be formed either as a general or limited liability company. The primary difference between the two types of LLCs is that a general LLC does not have any restrictions on the amount of assets a member may own while a limited liability company limits the amount of assets that a member can own. As you can see, there are many benefits of forming an LLC. The next time you are at a social gathering with business owners, make sure to introduce yourself as an owner of an LLC to increase your network of business connections.

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