The term LLC is the commonly used acronym for Limited Liability Company. An LLC is a hybrid business entity that combines many of the best features of corporations with those of partnerships.
Like a corporation, an LLC is a separate legal entity distinct from its owners; thus removing the owners and managers from any personal liability for the company's debts or obligations.
Unlike a traditional, or "C" corporation, an LLC passes its income or losses through to its members. This places the tax impact of the activities of the LLC upon the members and not on the LLC entity.
Two primary documents define the LLC:
- Certificate of Formation: The LLC comes into existence when a Certificate of Formation is filed with the Delaware Secretary of State. The Articles of Formation are the statements made in this document. It then receives an official seal from the Delaware Secretary of State to create the formal LLC charter.
- Limited Liability Company Agreement: The framework of the LLC is defined by the operating agreement also known as the Limited Liability Company Agreement.
LLC Managers and Members
The day-to-day business of the Limited Liability Company is conducted by its Manager or Co-Managers and is governed by the operating agreement. This written agreement among owners allows the ability to create a customized management structure clearly outlining the economic relationship among the owners.
If you form your LLLC with The Incorporators, an operating agreement (that may be edited as you wish within the law, as set out in the Delaware Limited Liability Company Act) is included in your package.
Non-regular business of the Limited Liability Company, (borrowing money or making a major capital expenditure, for example) may, with proper authority set out in the LLC Agreement, (unlike the Corporation which requires meetings and minutes) be accomplished directly by the Manager(s).
The owners of an LLC are referred to as members. Members are obligated to the organization only to the extent of their contribution.
Running an LLC
The important fact to remember in operating the Limited Liability Company is to treat it as an entity separate from the members. If the members or managers act as if they are the Limited Liability Company, there exists the possibility that a court will set aside the liability protection and look to the members for individual liability.
The Limited Liability Company should have its own checking account, its own insurance policies and contract in its own name.
In order to validate the existence of the Limited Liability Company, proper formalities must be observed such as signing and dating appropriate documents and following the formality of acting through the entity when conducting business.
An LLC requires some thought as to its organization, but if properly structured an LLC allows you the opportunity to have the limited liability typically associated with a corporation while at the same time enabling you to be treated as a partner for federal tax purposes.