Limited Liability Company LLC

A Limited Liability Company (also referred to as an LLC) is a business structure that has gained popularity because the owners are faced with very restricted or limited liability for debts and actions of the LLC. The LLC also acts more like a partnership, with pass-through taxation and management flexibility.

LLC owners are called members. Because ownership is not restricted by most of the states, a member might be an individual, trust, corporation, foreign entity, or other LLC. There can be an unlimited number of members. It is permissible in most states to also have LLCs which only have one member.

One of the basic and most attractive elements of an LLC is that it provides protection against personal liability. A corporation does the same, however an LLC is what is considered a pass-through tax entity, while a corporation may pay taxes. Corporations also have more administrative requirements such as required annual meetings and minutes of meetings. Because of this the LLC is much easier to manage than a corporation. Profit and loss held by the LLC pass through to the owners and are reported on personal income tax returns. This is similar to what happens with a partnership and sole proprietorship. Another great benefit is that LLC’s also have “charging order” protection like FLP’s. (See FLP link)

With an LLC you’ll enjoy limited personal liability and protection from creditors. Unless a member has provided a personal guarantee, if the LLC cannot pay a lender or vendor, the creditor has no claim to the member’s personal possessions like a home or savings. Only LLC assets are used to pay business debts. So an LLC owner would only lose what he or she invested into the LLC, and this feature is known as “limited liability.”

Most importantly if an LLC is not created or operated correctly, or doesn’t have the proper legal documentation or is not treated as a separate business by the owners, a court might determine that the LLC doesn’t really exist. This is called “piercing the veil”. If a court “pierces the veil” then the owners will be found personally liable for the debts and obligations of the LLC.

Posted in Asset Protection

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