Limited Liability Company - Definition, Examples, Processes (2023)

a limitedResponsibilityCorporation is an American form of private company that incorporates the limited liability of agroupwith the simplified taxation of asole owneror association. Owners of a limited liability company known as an “LLC” report the company's profits and losses on their personal income tax returns, rather than preparing separate corporate income tax returns. This is known as a "transfer tax". LLC owners are called "Members" and the business can be owned by one person, two or more persons, or a corporation or other LLC. To explore this concept, consider the following definition of a limited liability company.

Definition of Responsibility


  1. The state of being legally responsible for or legally obligated to do something.


1790 middle english

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What is a limited liability company?

Like shareholders in a corporation, LLC members are protected from personal liability for business debts and claims. In case the company defaults on its debts such as rent, loan payments and business needs, the only thing the creditor can do is file a lawsuit against the assets. This protects the personal assets of members who are at risk of losing only the money they have invested in the company, not their home, car or other personal assets.

For example, a sidewalk on Happy Housing LLC's apartment complex property is broken, causing a tenant to trip and fall. If the renter wants to file a lawsuit for his injuries, he must file the lawsuit against the LLC, not the landlords. If the tenant wins the case, he can only chargedanoagainst assets owned by the LLC, not their owners.

Exceptions to the Limitation of Liability

The liability protections of LLC members are not absolute. Likewise, shareholders can be held liable for certain actions, as can LLC members. Some of the issues for which an LLC member can be held liable include:

  • Member provides a personal guarantee for a business debt or business bank loan
  • The member personally and directly harms a person
  • Member's failure to pay taxes withheld from employee's salary
  • The member knowingly does something illegal, fraudulent or reckless that harms the company or an individual.

For example, when James, an employee of Ready-Made Pizza LLC, runs over a man at a crosswalk while delivering pizza. It turns out that James was driving under the influence of alcohol at the time of the accident. Ready-Made Pizza can be held liable for its employee's negligent actions at work. The man can take hisgrantof insurance claims and the assets of the LLC, but not the owners of the business.

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However, if Todd, owner and manager of Ready-Made, knew that James was drinking but sent him out to make a delivery anyway, he could be held personally responsible for the accident. This is because Todd recklessly dispatched a drunk driver to a pizza delivery service, resulting in someone being seriously injured.

The Liability of an LLC for the Personal Debts of Its Members

An LLC's assets generally cannot be taken directly from creditors to pay off an owner's personal debt. Other actions that can be taken in such a situation vary by state, but may include:

  • loading sequence. A collection order is a court order for the LLC to pay a corporation member's earnings directly to the creditor until the debt is paid off.
  • mortgage processin the interests of the LLC. A creditor may pledge the member's shareholding in the company to pay off his personal debt.
  • dissolution order. A creditor can obtain a court order dissolving the LLC. In this case, the shareholder's income from the dissolution and sale of the company's assets is passed on to the creditor to settle the debt.

Individual Protection LLC

The question arises as to whether a single-member GmbH enjoys the same collection protection as a multi-member GmbH. The purpose of requiring a collection order to collect an owner's profit is to protect the other members of the LLC. In case the company is owned by a single shareholder, this protection is not necessary. Courts in some states hold that single-member LLCs are not entitled to the protection of a collection order that allows creditors to directly mortgage the member's interest in the corporation to meet their personal obligations.

Maintain the LLC as a separate business entity

Another situation that can result in an LLC owner being held liable for the company's actions and debts is when they treat the LLC as an extension of their personal affairs rather than a separate business entity. In that case, a court can determine that the owner is in fact doing business as an individual and is trying to hide behind the limited liability of the company and order him to be personally responsible for his actions and debts as a result of the business. To ensure that the LLC is perceived as a separate legal entity, owners must take certain steps:

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  • act legally and fairly. Never misrepresent or attempt to conceal any material fact or the state of the owner's personal or business finances from creditors, suppliers or others.
  • Properly Fund the LLC. Provide the company with sufficient cash to ensure that it can meet anticipated operating expenses and financial liabilities.
  • Keep LLC finances separate. Use a state employer identification number in place of a member's Social Security number, maintain a business-only account, and never mix up personal finances on company books.
  • Create an operating agreement. Drawing up and following a formal operating agreement for a limited liability company helps establish the existence of a separate business entity.

Disadvantages of a limited liability company

The first disadvantage of an LLC is the lack of flexibility to add or remove owners from the business. In many states, when a member leaves an LLC, the business entity must be dissolved for any reason and all legal obligations to close a business must be met. The remaining members can form a new LLC if they wish.

Members of an LLC are considered self-employed and must pay self-employment tax contributions to their Social Security and Medicare accounts. This tax amount can be based on the total net income of the LLC.

Formation of an LLC

To incorporate a limited liability company, articles of incorporation must be filed with the state's LLC department, which is usually a division of the Secretary of State's office. Most states offer a one-page form that makes it easy to create statutes, and filing fees vary by state. Information provided in the bylaws includes the name and address of the LLC, registered agent contact information, and the names and addresses of members of the LLC. An operating agreement must be prepared that establishes the rights and duties of each member, as well as their percentage of participation in the company and their participation in the profits.

Specific steps to form an LLC include:

(Video) Limited Liability Company Definition

  1. Choose a company name. The LLC name must be unique and indicate that the entity is an LLC. This is done by including the term "LLC" or "Limited Liability Company" in the actual name. The name cannot contain words restricted by the state in which the business is registered, such as "bank", "Trust', 'insurance', 'university' or 'university'.
  2. Organization's archive articles. Completed articles of incorporation must be submitted to the country office responsible for business organizations. This is usually the Office of the Secretary of State, but may also be the State Enterprise Commission, Department of Commerce and Consumer Affairs, Department of Consumer and Regulatory Affairs, or Department of Enterprise. When articles of incorporation are filed, the LLC name is automatically registered, eliminating the need for a separate name filing.
  3. Create an operating agreement for a limited liability company. While most states do not require an operating agreement for LLCs and the agreement is not filed with the state, it is a highly recommended document for all businesses. The operating contract gives a certain structure to the organization, management and finances of the company.
  4. Obtain the necessary permits and licenses. Once the LLC is registered, licenses and permits required by local, state and federal government agencies must be obtained to legally conduct the business.
  5. declare the agreement. Many states require that an LLC incorporation be published in the local newspaper. Requirements vary depending onjurisdiction, which is why it is important to consult the commercial registry office before publication.

Manage an LLC

In most LLCs with two or more owners, the members share leadership of the company equally. This is known as a "member-managed" LLC. An alternative method of running an LLC is to appoint an individual, rather than a member or outsider, to be responsible for the day-to-day running of the company. This "management run" LLC allows non-management business owners to reap the profits without the stress of management. However, only the designated manager can act as the LLC's representative and make administrative decisions.

Foreign Limited Company vs. National

A domestic limited liability company or corporation is a business that operates in the same state in which it is incorporated or incorporated. A foreign limited liability company is a company that does business in a country other than the country in which it was incorporated. The documents of incorporation for an LLC in most states do not have a specific designation for a domestic corporation, but all have a designation for a foreign corporation.

Taxes on limited liability companies

The IRS considers an LLC to be a "pass through company" for tax purposes rather than a separate entity. Essentially, this means that operating income goes directly through the company to members, who then must declare profits and losses on their personal income tax returns. Each member of an LLC must submit estimated taxes to the IRS on a quarterly basis. In this way, the LLC itself does not pay taxes and does not file an income tax return. However, members must complete IRS Form 1065, which provides the IRS with information about each member's membership in the corporation.

Terms of use and related legal issues

  • business unit– An organization established and existing independently of any other business or personal interest.
  • dano– a monetary award as compensation for financial loss, personal loss or damage, orreal estate, or an injury.
  • stunned– Act without regard to consequences, without caution or carelessness.
  • registered agent– A person designated by a business entity to receive legal correspondence andprocess serviceOn behalf of the company. The registered agent, also referred to as a “resident agent” or “legal representative”, may be a company administrator, a businessperson or a third party hired specifically for this purpose.


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