Limited Liability Company (LLC) – Definition and Explanation

Creating a business today involves many decisions. A really big one faced by business owners is what type of company structure is in the best interest of all aspects, from owners to consumers. Businesses can be set up as a corporation, partnership, or any one of many other styles. One choice that may be of benefit to look at is the limited liability company. This type of structure can be an ideal method for setting up a new small business. A limited liability company provides protection to everyone involved. how to form an LLC in California

The limited liability company, also known as LLC, is an ownership structure which combines some of the best features of a corporation with the benefits of a partnership. Ownership is set up and spread out to an unlimited number of members. These members can be people, corporations, or even other LLCs. While operating in ways similar to a partnership, the LLC is not considered one. Membership changes the way taxes are handled, as well as the organization and liability of the members is taken care of. There are both advantages and disadvantages in forming an LLC.

Deciding to establish as a limited liability company has some distinct advantages. The most obvious is the fact that there is limited liability. This means that the owners of the company aren’t held liable for the debts incurred by the company. LLCs also have more flexibility when it comes to profit distribution than partnerships. There is no set way to distribute the profits, unlike partnerships where the division is generally 50/50. Corporation structures are required by definition to keep minutes and record resolutions of all of their meetings. LLCs do not have these requirements, so the management levels are much easier to maintain.

There are also disadvantages to forming a limited liability company. Because they are structured on a membership system, if a member dies, or has to file bankruptcy, the entire LLC has to be dissolved. This can make the life of the company very limited. An LLC also can not sell shares of the company publicly. It also means that employees can not be issued stock as an incentive like profit sharing. There is also more paperwork involved in the running of an LLC; much more than in other business structures such as corporations and partnerships.

Setting up a limited liability company can be simpler than other forms of business structures. There are ultimately only 2 main things that have to be established. The first is the articles of organization. This is a listing of who is a member of the LLC, and what their main role is. This is then filed with the Secretary of State. The other major step is to create an operating agreement. An operating agreement is a way to set forth the way profits are distributed, responsibilities of the members, and the system used for changing ownership. This ease of setup is part of what has made using a limited liability company so attractive in today’s economy.