These frequently asked questions which are what is an LLC and how does it work have been the prerequisites to learning and staying relevant with the knowledge of the limited liability company popularly called LLC. A limited liability company is the United States-specific form of a private limited company. It is a business structure that can combine the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation.
It is not a corporation under the laws of every state; it is a legal form of a company that provides limited liability to its owners in many jurisdictions. LLCs are well known for the flexibility that they provide to business owners; depending on the situation, an LLC may elect to use corporate tax rules instead of being treated as a partnership, and, under certain circumstances, LLCs may be organized as not-for-profit.
It is profitable to add that membership interests in LLCs and partnership interests are also afforded a significant level of protection through the charging order mechanism. The charging order limits the creditor of a debtor-partner or a debtor-member to the debtor’s share of distributions, without conferring on the creditor any voting or management rights.
Concept of LLC
Although we may have defined what an LLC is, yet it is okay if we decide to also shed more light to the subject as a concept of business protection and all.
A limited liability company (LLC) is a business structure in the U.S. that protects its owners from personal responsibility for its debts or liabilities. Limited liability companies are hybrid entities that combine the characteristics of a corporation with those of a partnership or sole proprietorship.
Any entity or individual can be a member of an LLC with the notable exceptions of banks and insurance companies. LLCs do not pay taxes on their profits directly.
An LLC is a formal business arrangement that requires articles of organization to be filed with the state. An LLC is easier to set up than a corporation and provides more flexibility and protection for its investors. LLCs may elect not to pay federal taxes directly. Instead, their profits and losses are reported on the personal tax returns of the owners.
How it Works
Like a corporation, LLCs are required to register in the states they are “conducting (or transacting) business”. Each state has different standards and rules defining what “transacting business” means, and as a consequence, navigating what is required can be quite confusing for small business owners.
Simply forming an LLC in any state may not be enough to meet legal requirements, and specifically, if an LLC is formed in one state, but the owner (or owners) are located in another state (or states), or an employee is located in another state, or the LLC’s base of operations is located in another state, the LLC may need to register as a foreign LLC in the other states it is “transacting business.”
There are two ways in which the structure of an LLC is classified:
- Ownership structure
An owner of an LLC is called a “member.” This is similar to a shareholder in a corporation. If there is only one member, it is known as a single-member LLC. If there are two or more members, it is known as a multi-member LLC.
- Management structure
The day-to-day operation of the business is controlled by “managers” of the LLC. Managers are similar to the officers of a corporation. Members of an LLC may also serve as managers, in which case it is called a member-managed LLC. This is more common in single-member, and small multi-member, LLCs. If members of an LLC hire non-members as managers, it is called manager-managed, which is more common in larger, multi-member LLCs.
On Decisions
The LLC members make major decisions, whereas the managers conduct the day-to-day operations. Property is owned in the name of the LLC. If you decided to open a franchised business, the franchise would be in the name of the LLC. In most states, an LLC is not required to hold annual meetings of the members, or to keep minutes of meetings.
