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Limited Liability
Corporations (LLC)
A Limited Liability Company has
the advantage of being a hybrid
between a partnership and a Corporation. The
advantage of a Limited Liability Company is that
most states require fewer formalities be
observed in an LLC in comparison to a
corporation.
This type of corporation blends the tax
advantages of a partnership and the limited
liability advantages of a corporation. Owners of
an LLC are referred to as "members." As you
might expect, it also has some limitations but
is definitely worth considering.
Advantage: One LLC Member
Required. Historically, most states require that
a Limited Liability Company be comprised of at
least two LLC members. Today most states and the
IRS recognize the single-member LLC as a
legitimate business structure.
Separate Legal Entity Like
limited partnerships and corporations, the
Limited Liability Company shares a similar
advantage -- it is recognized as a separate
legal entity from its "members."
Limited Liability Ordinarily,
only the LLC is responsible for the company's
debts thus shielding the members from individual
liability. However, there are some exceptions
where individual members may be held liable:
- Guarantor Liability:
Where an LLC member has personally
guaranteed the obligations of the LLC, he or
she will be liable. For example, where an
LLC is relatively new and has no credit
history, a prospective landlord about to
lease office space to the LLC will most
likely require a personal guarantee from the
LLC members before executing such a lease.
- Alter Ego Liability:
Very similar to the judicial doctrine
applied to corporations where a court may
hold the individual shareholders liable
where the business entity is merely the
"Alter Ego" of its shareholders, a member of
an LLC may also be held liable for the LLCs
debts if the court imposes its "alter ego
liability" doctrine.
Please note, however, that although a
corporation's failure to hold shareholder or
director meetings may subject the
corporation to alter ego liability, this is
not the case for LLCs in California. An
LLC's failure to hold meetings of members or
managers is not usually considered grounds
for imposing the alter ego doctrine where
the LLCs Articles of Organization or
Operating Agreement do not expressly require
such meetings.
LLC Management and Control
Management and control of an LLC is vested with
its members unless the Limited Liability
Company's articles of organization provide
otherwise.
Voting Interest Ordinarily,
voting interest in an LLC directly corresponds
to interest in profits, unless the articles of
organization or operating agreement provide
otherwise
Transferability No one can
become a member of an LLC (either by transfer of
an existing membership or the issuance of a new
one) without the consent of members having a
majority in interest (excluding the person
acquiring the membership interest) unless the
articles of organization provide otherwise.
Duration An LLC does not have a
reliable continuity of existence. The articles
of organization must specify the date on which
the Limited Liability Company's existence will
terminate. Unless otherwise provided in the
articles of organization or a written operating
agreement, an LLC is dissolved at the death,
withdrawal, resignation, expulsion, or
bankruptcy of a member (unless within 90 days a
majority in both the profits and capital
interests vote to continue the LLC)
Advantage: Formalities. The
existence of an LLC begins upon the filing of
the Articles of Organization with the Secretary
of State. The articles must be on the form
prescribed by the Secretary of State. Among the
required information on the form is the latest
date at which the LLC is to dissolve and a
statement as to whether the LLC will be managed
by one manager, more than one manager, or the
members.
To validly complete the formation of the LLC,
members must enter into an Operating Agreement.
This Operating Agreement may come into existence
either before or after the filing of the
Articles of Organization and may be either oral
or in writing.
LLC Meetings
While many states do not
require that your Limited Liability Company hold
meetings on a regularly scheduled basis, it's
always wise to conduct meetings with your
members to ensure the LLC is in agreement in all
its endeavors.
Opening a Bank
Account
Most banks require only a copy of your Articles
of Organization and your federal Employer ID
Number to open a bank account. Some, however,
may also require a resolution passed by the
Limited Liability Company's members and a copy
of the LLC Operating Agreement before opening an
account. To better determine your bank's
requirements, you should contact the branch
manager and ask about their requirements for New
Accounts.
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Limited personal liability for the owners (like a
corporation and unlike a partnership).