How Does a Limited Liability Company Work?

Definition

A limited liability company (LLC) can be described as one in which the owner’s (or owners’) liability for the company is limited to (only) what they have invested in it. Unlike a sole proprietorship or a partnership, the owner’s property usually can’t be sold to cover debts that the business has incurred, thought there are a few exceptions to this. As such, the limited liability attains a legal distinction from that of its owners. This distinction varies according to state laws, but enables the limited liability company to transact business, own property and employ people while acting as a legal entity separate from its owner or owners.

Running an LLC

A limited liability company can either be managed by its owner or owners, or it can be managed by employed managers. Unlike a corporation, a limited liability company is not required to have a board of directors, and can actually be set up by a single (natural) person. In terms of taxation, a limited liability company can choose to be taxed either as a sole proprietorship, a partnership or a corporation. It is worth noting that in some states, limited liability companies have to pay an small additional tax on account of their status. A trend is emerging where many business people running sole proprietorships are opting to "upgrade" them into limited liability companies, given that through a limited liability company a businesses owner is able to access the benefits of limited liability without having to suffer the taxation burden that comes with incorporation. Furthermore, getting a limited liability company up and running involves much less paperwork than is required for a corporation.

Considerations

It is worth noting that lenders and investors might be uncomfortable financing limited liability companies, given that it would be hard to sell their stakes in the company upon its maturity. These reservations can be remedied with the understanding that a limited liability company can be converted into a corporation at a later date, though some might see this as an expensive legal procedure that could be avoided from the beginning.

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