Limited Liability Company Overview

A Limited Liability Company is a highly attractive business structure for individuals who want to avoid personal liability in the event of lawsuits. If an individual sues a company in a personal injury action, the members of an LLC typically will not have to pay for damages out of their own pocket. Instead, these individuals will only have to pay for a judgment to the extent that proceeds from the LLC can fund the judgment.

This limited-liability protection has made creating LLCs a popular option in the United States. The first LLC was created in Wyoming in 1977, and millions of them have been created since that date. Provided that everything is set up properly, owners in an LLC will not be personally liable for debts that may befall the company. In the past, owners in sole proprietorships or partnerships had to pay funds from their own bank accounts to cover the debts that a company faced. This is no longer the case.

Requirements and Benefits

The requirements for creating a Limited Liability Company are governed by state statute. One should look to his or her state requirements to find out about the application process for obtaining LLC status. When individuals create Limited Liability Companies, they are usually not required to go through the same formalities that are required for creating a corporation. They typically do not have to maintain bylaws or meeting minutes. Annual meetings generally are not required. This lack of requirements is one of the other reasons LLCs have become such an attractive option for individuals.

One of the other major benefits of creating an LLC is the ability to retain pass-through tax status. Pass-through tax status means that individuals are taxed as if they are self-employed. Additionally, there are certain types of deductions that an LLC may qualify for on a tax return. Another benefit of pass-through tax status means that a company is not taxed twice in the way that corporations often are taxed; corporations typically pay taxes on their earnings and then shareholders also pay taxes on distributed dividends from the corporation. This can allow a business and its ownership to significantly cut its tax bill.

Nonprofit organizations may be set up as LLCs as well, depending on state requirements. Creating one for a non-profit entity may be a good way to protect the assets of the company and members involved with the entity, depending on the needs of the organization.