What are the advantages of a limited liability company?
A business proprietor has a range of options when it comes to selecting the framework for running their business. These options span from the uncomplicated, like a sole proprietorship, to the more intricate, such as a C corporation. A particularly favored choice is the limited liability company (LLC). What sets the LLC apart is its hybrid nature, blending the adaptability of a partnership with the asset safeguarding of a corporation. The advantages of an LLC are manifold, as our LLC lawyer discussed below.
Distinct Legal Existence
One advantage of a limited liability company is that it is an independent entity distinct from its proprietors, possessing its own entitlements, duties, and liabilities. Consequently, an LLC has the capacity to initiate legal proceedings (or be exposed to them) under its own name. The business is also empowered to acquire, possess, and utilize its own tangible or intangible assets, establish its own agreements and assurances, extend loans, and deploy financial resources. Those engaged in transactions with a limited liability company are required to deal directly with the company for any owed debts instead of with the LLC’s managers or members.
Limited Liability Explained
Due to its distinct entity status, the proprietors of a limited liability company benefit from limited liability, a key advantage of a limited liability company. Limited liability ensures that the LLC members’ personal assets are shielded from being utilized to settle the company’s debts and commitments. A member’s potential loss is restricted to the value they initially invested in the enterprise.
TIP: While limited liability protection is without doubt an advantage of a limited liability company, it is important to note that limited liability is not all-encompassing. Should a member co-sign a loan or provide a guarantee for the business’s obligations, their personal assets may be at risk. Additionally, a court may choose to overlook the LLC’s separate existence (referred to as “piercing the veil”) and gain access to a member’s assets. This could occur if the member exerted full control over the business and failed to treat it as a distinct entity; employed the LLC structure for fraudulent or unjust purposes; or if it would be deemed unjust to regard the company and member as distinct entities. Some state laws explicitly state that the separate existence of an LLC can be disregarded to the same extent as that of a corporation. Nevertheless, even in states without this statutory provision, courts have occasionally chosen to disregard the entity according to the member’s behavior.
Continual Existence
Another advantage of a limited liability company is that unless otherwise stated in the articles of organization, an LLC enjoys perpetual existence. This signifies that changes in ownership do not automatically lead to the company’s dissolution. Factors such as a member’s passing, retirement, or departure from the business for any other reason do not necessitate the cessation of operations.
The majority of state statutes governing LLCs dictate that the company is only dissolved under the following circumstances:
- An event detailed in the operating agreement takes place.
- The members collectively agree to dissolve the company.
- An administrative or legal action results in the company’s dissolution.
In certain states, the LLC Act indicates that the passing or withdrawal of the last remaining member triggers dissolution. Nevertheless, even in such states, the company can stipulate the appointment of a new member to guarantee its continuity.
Adaptable Organizational Framework
Like corporations, an advantage of a limited liability company is maintaining separate existence, limited liability, and perpetual existence. However, one distinct advantage of the limited liability company lies in its flexibility. The members of an LLC have a range of choices when it comes to structuring its management. According to state regulations, ultimate authority over the LLC’s operations lies with the members.
Nevertheless, the LLC can stipulate, through its articles of organization or operating agreement, that management responsibilities will be vested in appointed managers instead. These managers may be either members or individuals external to the LLC, according to what is outlined in the operating agreements. This adaptability is a unique advantage of a limited liability company. Indeed, it makes the limited liability company a good choice for a small group of owners seeking to jointly operate the business, as well as for a larger business venture with multiple owners situated in different locations across the U.S.
Unrestricted Financial Interests Transferability
A member of an LLC holds ownership in the LLC, and this ownership stake is referred to as a membership interest. A membership interest comprises two components: management rights and financial rights.
The financial rights of members encompass the entitlement to partake in losses and profits, in addition to getting distributions from the LLC. These rights are considered the member’s personal property, and the default legal provision allows them to be transferred without constraints (though the operating agreement may specify otherwise).
However, in most cases, state laws put limits on the transfer of remaining interests. This includes the right to engage in the LLC’s management. This signifies that a member may not transfer or sell their full interest, which includes management rights, without obtaining the consent of all remaining members. Naturally, the LLC’s operating agreement can deviate from these standard regulations, potentially stipulating a requirement for consent that is not unanimous.
An advantage of a limited liability company is that it also offers a safeguard known as “charging order” protection. This serves to shield the LLC (along with the other members) in the event that a member’s personal creditors try to take their interest in the LLC. While these creditors may gain access to the financial rights, they typically do not acquire the ability to take over the member’s management position in the LLC.
Flow-through Taxation
A major advantage of a limited liability company is that it functions as a “pass-through” tax entity. In basic terms, this signifies that the LLC’s profits, losses, income, credits, deductions, and other tax-related elements are passed on to the member or members. These individuals then report their respective portion of these tax elements on their personal income tax returns and are taxed at individual tax rates. Unless it opts for C corporation taxation, an LLC is not subject to taxation at the entity level.
TIP: This is a distinct advantage of a limited liability company. The distribution of tax elements can be specified in the operating agreement and is not obligated to mirror the ownership interests. Furthermore, profits, losses, and other tax-related elements do not have to be allocated in identical proportions.
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