Your Guide to Business Entity Types: Limited Liability Company
In today’s article, as a part of our Your Guide to Business Entity Types blog series, we’ll be discussing limited liability companies. Registering your company as this type of business can reduce the personal liability involved with owning a business on your own or with a partner without the need for incorporating. Additionally, you can still enjoy some of the benefits that you would with a partnership or sole proprietorship.
Read on to learn more about limited liability companies, and if you are interested in registering your company as an LLC or need legal assistance from a business attorney for any other reason, reach out to the team at Morris Law Group in Edina today.
What Is a Limited Liability Company?
A limited liability company (LLC) is a business structure that has the benefits of pass-through taxation and limited liability; and, due to its structure, has the benefits of partnerships, sole proprietorships, and corporations. Pass-through taxation means the LLC will not be taxed, but its members will be. Additionally, the limited liability of the organization protects its members from liability except in the most egregious of actions.
The Certificate of Formation
An LLC is organized by filing a Certificate of Formation with the Secretary of State’s office in the state in which you plan to operate the business. The LLC statute in the state the company is organized will have the information that must be included on the Certificate of Formation. The information generally required is the name and address of the LLC, and likely the management structure (manager or member-managed).
Management Structure
An LLC can be manager-managed or member-managed. A manager-managed LLC has a centralized or corporate management structure, whereas a member-managed LLC has a decentralized structure similar to a partnership, giving the individual members the authority to manage the LLC and bind it to agreements
The decisions on management style as well as the division of losses and profits, member taxation, transfer of membership interests, and dissolution are covered in the LLC’s operating agreement.
Liability
As the title suggests, an LLC provides its members with limited liability. A member will not be held personally liable for the debts or obligations of the LLC. In the event an LLC fails, its members will likely lose what was paid in membership interests, but their personal assets are protected.
Taxes
As for taxation, the IRS treats a two-member LLC the same as a partnership. A general partnership is usually taxed under subchapter K of the Internal Revenue Code and consists of provisions designed for the taxation of a business organized as a partnership. Under this subchapter, a general partnership is not required to pay federal income tax, but allocates its profits or losses to the partners as assigned by the partnership agreement, and is then reported on the partners’ personal federal income tax return.
A single-member LLC is taxed the same as a sole proprietorship. In a sole proprietorship, the proprietor reports the income or loss generated by the business on his personal federal tax return. The business itself does not file or pay federal income tax.
Learn More About Limited Liability Companies
Are you interested in learning more about how LLCs work? Or, how to apply for one yourself? The team at Morris Law Group is here to help. Our experienced business attorneys can assist you with everything from applying for an LLC for your business to understanding taxation, liability, and more. We commonly work with small businesses, restaurants, real estate firms, and other Minnesota businesses. Reach out to Morris Law Group today to schedule your free, no-obligation consultation with our Edina business attorneys. Serving the Minneapolis, Saint Paul and Western Wisconsin, Twin Cities Minnesota metro area.