The limited liability business structure includes the limited liability corporation (LLC) and the limited liability partnership (LLP). Both of these business structures have gained immense popularity since their introduction to the United States 1978. The concept of limited liability business structures originated in Germany, and is currently a favored choice for start-up and more established businesses.
Business Ownership Liability as the Foundation
What makes the limited liability structure unique is the actual approach that it has to the concept of liability. When considering a company structure, it is important to account for the liability of the owner. The owner’s liability is the personal obligation that the owner has to repay any outstanding debts of the business. These debts can be in the form of outstanding invoices to other businesses, legal judgments against the company, or business loans.
There are two standard types of liability: limited liability and unlimited liability. Limited liability means that the business owner has protected their personal assets from being used to repay business debts. The courts cannot legally force the business owner of a limited liability company to use their personal assets. In the case of the company having to liquidate assets in order to repay debts, only the owners money used specifically to invest in the business is at risk. This is the structure of liability that exists in Limited Liability Corporations and Partnerships. On the other hand, unlimited liability means that the courts can legally force an owner to use their personal assets to repay outstanding business debts.
Advantages of a Limited Liability Corporation
The advantage of the limited liability concept is a huge consideration for many choosing this business structure. Other advantages include the flexibility of an LLC to be taxed as a sole proprietor, S corporation or C corporation based on what the members of the corporation determine. Also taxes are done only at the shareholder level, which eliminates the issue that some other structures have of “double taxation” – a term to describe when individual owners are taxed at the personal and the business level on the same income stream. In addition to having a single owner (as is the case with the Limited Liability Corporation), this business structure can also have a partnership (as is the case with the Limited Liability Partnership).
Disadvantages of a Limited Liability Corporation
There can be some cost involved in setting up and maintaining a limited liability business structure. Also due to the structure, tax and accounting can involve additional complexities. The rules and regulations for the limited liability structure can vary by state. Some states require the drafting of a document called the Operating Agreement, which outlines the ownership and operating procedures of the entity, to be filed with the registration of the LLC or LLP.
Requirements for Establishing a Limited Liability Corporation
While the requirements for establishing an LLC or LLP vary in each state, the common requirements are as follows:
- Original Name – the name of the business must be original and not be a duplicate of a another business, and it must follow the naming convention for the state. The entity name must contain the abbreviation LLC or L.L.C or the words Limited Liability Corporation.
- Registered Agent – the name and contact information for the person responsible in the company to receive correspondence and formal legal filings is the registered agent. For a single owner LLC this is the owner, however for partnerships there needs to be a single person established.
- Articles of Incorporation – the formal filing that must be done in each state to formally file a corporation. This is usually accompanied with a filing fee in each state.
- Operating Agreement – this is a document that provides an outline for the operating procedures of the business, and is not mandated in every state. This documents the financial and working relationship of the co-owners if there is more than one in an LLP.
It is general best practice that the more liability can be limited, the better it is for the owner of the business. Understanding the liability of your selected business structure is imperative, as it will help to clarify the risks to which your personal assets are vulnerable. If protecting your personal assets is of paramount importance, selecting a limited liability structure will provide you the coverage you seek.