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Businesses can be organized in several different ways. One of the newer forms of business is a Limited Liability Company or LLC. The best way to understand an LLC is to compare it to a traditional corporation.
Limited Liability Company
A LLC is a legal entity that exists separate and apart from its owners. The owners of the LLC are called "members" (as compared to a corporation, where the owners are referred to as "shareholders"). An LLC is formed by filing articles of organization Secretary of State (filing fees are paid with the articles of organization).
There are three primary areas of an LLC that are attractive business owners:
The LLC, like a partnership, is given a pass through tax treatment, which means that profits and losses are reported on each member's individual tax return;
The LLC, like a corporation, provides liability protection for the members (assuming that potential debts and obligations are incurred in the name of the LLC and not the members individually), which means that creditors can assert their claims only against LLC and not directly against the members (again, assuming that the LLC is properly operated and the members do not personally guarantee any obligation of the LLC); and
The LLC provides flexibility in management and other issues while preserving the 2 advantages listed above.
A for-profit corporation is a business structure formed by filing articles or incorporation with the secretary of state. A corporation is recognized as being separate and apart from its owners. (The owners are called "shareholders".) As a separate entity, it has its own rights, privileges, and liabilities apart from the individuals who form it.
The shareholders of a corporation are generally not personally liable or responsible for the debts or obligations of the corporation. A stockholder's personal liability is usually limited to the amount of his, her or its investment in the corporation and no more. A corporation continues to exist after the death of or transfer of shares by one or more of the shareholders. A corporation pays taxes on its profits, and its shareholders pay taxes on dividends, unless "S" tax status is elected – then the profits and losses of the corporation "pass through" to the shareholders.
The shareholders of a corporation have only the money that they have invested into the company at risk – shareholders are generally not required to pay their own money to satisfy any debt of or judgment against the company.
A corporation's existence may continue on regardless of what may happen to its individual officers, directors or shareholders. Also, ownership of the business may be transferred, without disrupting operations, through the sale of stock.
Capital can be more easily raised with a corporation. This may be accomplished through the sale of stock or other equity interests.
Corporations can offer anonymity to its owners. The corporate name is used in the operation of the business, generally not that of the shareholders.
–Matthew Adams joined Hodges & Coxe in 2010 as an associate attorney and currently practices in the areas of estate planning, estate administration, business formation and organization, business transactions, corporate law and taxation. Please contact him for advice on these issues at (910) 772-1678.