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A limited liability company,
also known as an LLC, is a legal business entity
made to protect its owners from business debts,
claims and personal liability.
Owners of an LLC are called members. And just as
in a partnership, a limited liability company is
also a “pass-through” tax entity where the net
income of the business is passed through the
business and directly to the members of the LLC.
The owners/members of the limited liability
company are then responsible for reporting and
filing their own individual earnings on their
personal tax returns just as they would within a
partnership. Forming an LLC can become a little
more complicated than forming a normal
partnership as duties and profit sharing
can differ from one member to the next.
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become protected from personal liability and for
business debts as well.
For example, lenders, landlords and suppliers
can not go after personal property belonging to
the LLC owners. Yet they can legally go after
all assets of the LLC in order to pay off
outstanding debts and claims. And the owners
will most likely lose their investments which
they put into the business as well. |
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Furthermore, an LLC member/owner can be held
liable if the owner defaults on a loan, fails to
pay taxes or participates in any fraudulent or
illegal activities.
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Protecting your
personal assets
As an LLC owner, you can protect yourself and
your personal assets by obtaining a good
liability insurance policy. Even if your limited
liability protection is ignored by the courts, a
good liability insurance policy can protect your
personal assets.
Furthermore, a good liability insurance policy
can protect the assets of the LLC from a lawsuit
as well. However, most policies will not protect
the LLC from unpaid business debts. This is an
obligation that must be fulfilled by the members
of the LLC.
Taxes and LLC’s
An LLC is not considered a separate taxable
entity from its owners. Instead, all net income
is passed through the business and directly to
the owners of the LLC. This is called a
‘pass-through entity’ just as in a partnership.
Once net income has been passed on to the LLC
members, those members must then report their
share of the profits on their personal income
tax returns. And just as in a partnership, each
LLC owner must make estimated quarterly tax
payments to the IRS each year.
The LLC must fill out and file IRS Form 1065
each year with the IRS. And this form will
clearly state all profits earned by the
individual LLC owner.
The IRS Form 1065 is then reviewed by the IRS in
order to ensure that all LLC owners are
reporting their income earnings correctly and
regularly.
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Managing an LLC
Many times, LLC owners will have an equal share
in duties, responsibilities and in managing the
LLC business. And these agreements and
arrangements are known as a "member management".
When one LLC owner or more, takes on
responsibility for managing the LLC then this
becomes known as a "manager management"
position.
Yet non-managing owners such as investors for
example, have no part in managing the business
yet continue to receive their share of the
profits from the LLC.
The only members who are allowed to make
management decisions are those in the position
of “manager management”. And it’s the management
managers that become and act as the main agents
of the LLC business.
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Forming a Limited
Liability Company
To form a Limited
Liability Company you must file the "articles of
organization" with the LLC department of the
Department of Corporations for your state
government.
It should also be noted
that you can actually form an LLC with just one
member as well. And forming an LLC is as
simple as requesting and filling out the LLC
form with your name, address and the contact
information of one or all members who are going
to be owners in the LLC.
Furthermore, along with
filing the articles of organization, it is
important to create a clearly written business
management agreement stating how the business
will be run and operated as well as the
positions and responsibilities of each member.
Such an agreement must
make clear the duties of all members and how the
profits will be shared as well. And just as in a
partnership, an LLC can be dissolved if one of
its members decides to leave or walk away.
The remaining members must
then fulfill all responsibilities and
obligations of the LLC business. And such
responsibilities can include paying off business
debts and dividing and sharing profits amongst
the remaining members of the LLC.
This is why a “buyout
agreement” should always be made when forming
the actual LLC and filing the articles of
organization. And this agreement should clearly
state what happens to the assets and profits of
the LLC owner should that member decide to leave
or sell their share of the LLC business.
When forming an LLC with one or more members,
you should always create a clearly written
agreement stating all conditions and duties for
all members of the LLC in order to avoid any
conflict or confusion should any problems arise.
And in doing so, an LLC can run smoothly and
become profitable as well. |
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