Legalities of a Limited Liability Company (LLC)

The following are several queries and concepts explicit to Limited Liability companies and their corresponding answers and definitions. The data provided will present the basic knowledge needed for someone interested in forming an LLC. An additional bonus is the example that give real-world applications and bind everything together.

What is A Limited Liability Company?

A limited liability company or “LLC” is a company entity authorized by a specific law in most states of the U.S. and many foreign countries. In almost every case, the country or state in question issues a charter to the LLC upon its formation. LLCs’ most significant characteristic is part of its name; that is, it provides limited liability. In this regard, it is very similar to a corporation.

How Do You Form An LLC?

An LLC is established by filing the Articles of Organization with the appropriate secretary of state in the U.S. or other official agency in a foreign country. The Articles of Organization usually are very brief and straightforward and present only necessary information concerning the company’s name, the agent for assistance of process, the company’s address, and its members or manager.

How Is An LLC Structured?

An LLC is structured much like a partnership, although the partnership venture has members instead of partners. The LLC can be member-managed like a general partnership or manager-managed like a general partner does in a partnership. If the LLC is member-managed, all members have an even vote and choose between themselves on the financial policies and primary business and everyday operations. If the LLC is manager-managed, the members-only decide on significant business and financial decisions, and the manager supervises all of the day-to-day business operations.

How Is The Structure Of The LLC Chosen?

The LLC founding promoters or members determine the structure of the LLC. When the (AO) Articles of Organization are filed, the state requires that the founders determine whether or not the LLC is member-managed or manager-managed. The members have an expert attorney draft the Operating Agreement, which sets forth the members’ special rights and responsibilities and shelter matters such as capital grants, profit division, management, transfers of member interests, member meetings, indemnification and dissolution.

How do Accounting and Taxes Work?

The LLC can choose to be taxed as either a corporation or a partnership. However, it is better to be taxed as a partnership. This means that the LLC files an Information Return and points K-1s to its board members showing its share of the LLC income or loss. The members then record this amount on their own personal returns. The LLC, if it is taxed like a partnership, does not pay any income tax. Suppose the LLC is a single-member LLC. In that case, the founder may treat it as a neglected entity for tax purposes and report the taxation and detailed accounting on the member’s individual tax return. This reduces the necessity of a tax return for the LLC. If you are a part of the manufacturing industry, make sure to understand taxation laws that apply to a manufacturing business.

Charging Order Protection

A charging order is a court order prepared for a judgment creditor, tied to a limited partnership or liability company of which the judgment debtor is a partner or members which grants the judgment creditor the right to whatever patterns would otherwise be due to the debtor member/partner whose interest is being charged. The persistence of the charging order is to check the judgment creditor of an individual member/partner from access to the LLC/partnership assets while at the same time, giving the creditor some relief relative to distributions from the entity to the member/partner.


The following are some instances of when and why an LLC might be wisely selected:

Ms. Elizabeth is a widow, who with her residence, owns a three-plex. She is worried about potential liability above and beyond what insurance would cover and has chosen to place the THREE-plex into an LLC where she is the single-member. She treats it as a neglected entity for tax purposes, and all of the tax and accounting are reported on her personal return.

Alan, his brother Charlie and their friend, Shawn, each own a one-third interest in a shopping complex. They have created an LLC to hold the shopping center title to preserve their respective personal assets from any claims concerning the shopping center. All three of them equally participate in the LLC, a member-managed by the three of them, and manage it as a partnership for tax purposes. The LLC files a partnership Return and Charlie, Alan and Shawn each receive a K-1, which they report on their own personal tax returns.

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