Understanding an LLC

0
1148
Understanding LLC-Executive Chronicles

ExecutiveChronicles|The business world is evolving, and new investment plans are becoming popular. Investors have in recent years turning to LLCs as their main investment plan over the formerly limited partnership. However, not everyone understands what LLCs are and how they operate or even its benefits. There are people who even sign for these agreements without knowing what they are signing for. To avoiding getting twisted around while in the middle of a business plan, this blog will help you on understanding LLC and how it can profit your company.

What is an LLC?

Before you start a LLC, it is essential to know what it is and its importance in the business arena. Limited Liability Company (LLC) is a legal structure that combines the benefits of partnership and corporation. This structure attracts multiple benefits, including:

Low-Cost Formation

Unlike starting a corporation limited company, LLC will only require little money to get established. For instance, if you are starting an LLC among family members, with a few hundred dollars, you are good to go. You can also file your paperwork through online services and provide the operating agreements, embossed binder, blank limited liability company membership certificates and more. 

Taxation

With LLC, you can either pass-through taxation or elect for corporate-level taxation. In other words, you can choose to pay company taxes through its earnings as a regular Stock Corporation. Or, you can choose to prepare K-1 statements for investors and indicate their losses and profits in the business. However, this can also be indicated in their personal income tax filings declaration.

Personal Liability Protection of LLC

With a limited liability company, owners have similar liability protection as corporate shareholders. This is to say, owners can protect their personal assets from business debts, unless under rare occurrences. However, in LLC, a creditor can request a charging order and seek a personal judgment of a member. This can result in claiming a member’s business economic interest, but personal assets such as savings, house, etc. remain protected. The charging order allows member’s cash distribution will be paid to the creditor to satisfy the debt. However, that doesn’t restrict the member or deny him/her the management participation or voting rights as a member. It also doesn’t empower the creditor to participate in the running of the business.

On the other hand, in a sole proprietorship or partnership, there is no significant separation between personal and business assets. Therefore, in this structure, a creditor is allowed by law to pursue personal assets to settle business debts.

Operating Agreements and Management Structure

An LLC allows more options and flexibility in creating a management structure. It becomes even more advantageous if the LLC has multiple managers or members. Some of the options include:

  • Members can appoint managing officers
  • Member managed, that is members are in charge of the company running
  • Manager-managed, members appoint managers to be in charge of the day-to-day company running. However, this is a structure that mostly applies to the corporation.

Additionally, the LLC also allows members to draft and customize operating agreement, which empowers members to structure their company. Operating agreement and partnership agreement are quite similar as they all layout responsibilities and rights of all parties. The operating agreement includes:

  • The occurrence of membership interest transfer
  • Valuing membership interest
  • Responsibilities and duties of management and members 
  • Each member and manager permission, rights, restrictions, and powers

Other member related issues that are inclusive in an operating agreement include:

  • Member removal procedure
  • Voting decisions and rights that require voting unanimously
  • Members commitment time
  • Issues that lead to member approval
  • Management compensation

Conclusion

There are several other aspects of LLC and understanding the entire LLC can take some time. However, once you start an LLC, it is essential to seek legal presentation to ensure you understand its critical operations. Additionally, before committing to investing in a limited liability company, communication among sole members is quite essential to ensure you make the decision together as a team.