Law Lingo: Limited Liability Company (LLC)
Welcome to Law Lingo: a monthly blog series brought to you by The Brown Law Firm, LLC that explains estate planning terminologies in simple terms. This month we will explain limited liability company (LLC).
If you are planning to start a business, it is advisable to create a business entity such as a sole proprietorship, corporation, partnership or limited liability company (LLC). First, let’s briefly explain each type.
• A sole proprietorship is an independent company owned by one person who is personally liable for all business transactions.
• A corporation is an independent company owned by shareholders and protected from liability.
• A partnership consists of two or more people who unite to run a business. Each partner is personally liable for debts.
• An LLC combines features of both corporations and partnerships. There can be multiple owners and a manager can be hired to run the business.
An LLC is a separate business entity like a corporation but the LLC does not pay taxes. Instead, any profits or losses must be reported on the owners’ personal taxes. This is referred to as a pass-through tax entity.
An LLC has limited personal liability. This means as an LLC owner, you may not be personally liable for debts owed by the LLC (in many cases – see exceptions below). However, any assets the LLC has can be used to pay off debts. So, as an LLC owner, any money you’ve invested into the business can be at risk if there is a debt that needs to be paid – but your personal assets will likely remain safe.
There are exceptions to limited liability: If you misuse the LLC, personally harm another person or engage in fraudulent or illegal activities that are harmful, you CAN be held personally liable. It is important to keep your personal finances and affairs completely separate from the LLC. This applies to every owner of the LLC. If the court determines that the owners are using the LLC improperly or for personal benefit, one or more owners may be held liable.
The formation of an LLC is more difficult than setting up a partnership, but it can be easier than a corporation. To determine which type of business entity is right for your unique business, it is best to work with a business planning attorney to learn the specific ramifications of each type. For example, if you are going to seek outside investors, many will only fund corporations. By sharing your business goals with a professional, the attorney can bring up possible scenarios that you may not have considered in order to guide you to the best options.
Still confused by LLC or any other legal terms? The Denver business planning lawyers at The Brown Law Firm, LLC are here to help. Contact us at (303) 339-3750 or send us a message online to meet with our experts.