A Limited Liability Company, or LLC, gives a company certain liability protections and tax advantages with fewer formalities than other business entity classifications. The intention is to provide an entity with low start-up costs that is easy for the members to operate. The information below highlights some of the important characteristics of an LLC. For further discussion of creating an LLC or whether it is the right choice for you, contact attorney Steven G. Storrs at 269-945-2242 or via the online contact form to schedule a consultation.
What’s the difference between a manager-managed LLC and a member-managed LLC? LLCs are either manager-managed or member-managed. Below highlights the key differences (any of which may be altered in an operating agreement):
Management Rights: Members have all management rights.
Authority to Bind the LLC: Each member has the authority to bind the LLC.
Fiduciary Obligations to Others in the LLC: Members have fiduciary obligations to each other and to the LLC.
Management Rights: The manager has most management rights. Members make few decisions.
Authority to Bind the LLC: Only the manager may contractually bind the LLC. Members have no such authority.
Fiduciary Obligations to Others in the LLC: The manager has fiduciary obligation to members and to the LLC. Members have no such duties.
*Manager-managed LLCs must say so in the articles of organization. If the articles are silent regarding management rights, the LLC is member-managed.
What is in the operating agreement? An LLC has an operating agreement signed by each of the initial members. That agreement addresses such subjects as: member voting rights, how members make decisions, member capital contributions, member admission and withdrawal, membership interest transfer restrictions, membership interest purchases on death, etc.
The LLC should always consult its operating agreement before drawing any conclusions about rights and duties. If the operating agreement does not address the subject, the LLC statute might.
What is an LLC membership interest? A membership interest means all of an LLC member’s rights, including the right to vote, inspect LLC records, and receive distributions from the LLC. Members in a member-managed LLC are also the beneficiaries of every other member’s obligations to act in the LLC’s best interests.
What decisions do the members make? In a multimember, member-managed LLC, members make all LLC decisions. Those decisions include such things as the following:
- day-to-day LLC operations
- distributions to LLC members
- amendment of the operating agreement or articles of organization
- dissolution of the LLC
- merger of the LLC
- transfer of substantially all of the LLC’s assets
- admission of new members
How do members make decisions? Member votes on LLC decisions can be accomplished either through meetings, written communications, or in any other manner acceptable to the members. Consult your operating agreement for specific rules.
The LLC’s Liability Shield
Does the LLC give “limited liability” protection to its members? Yes. The LLC’s members have no personal liability for the LLC’s obligations. This limited liability protection is similar to that enjoyed by corporation shareholders. It is also a bit more complicated than meets the eye.
What kinds of personal liability do you retain, even with an LLC? The LLC liability shield does not protect members from all personal liability. Members will continue to have personal liability in at least the following significant areas:
- personal carelessness that injures someone or destroys property, even if the member were acting on behalf of the LLC.
- any contracts you make personally, such as a member’s personal guarantee of a bank loan to your LLC. A member may even have personal liability under some written LLC contracts if you fail to indicate the representative capacity in which you are signing.
- loss of the LLC liability shield. This is more likely to happen, for example, if a member comingles the LLC’s funds with his or her personal funds or otherwise fail to follow the principles described above.
LLC Tax Matters
Does the LLC pay income tax? No. LLCs are taxed like partnerships. Each member reports its share of the LLC’s income, loss, deductions, credits, etc., on that member’s tax return. Each member must pay tax regardless of whether the LLC distributed any cash during the year. The operating agreement may require distributions in amounts sufficient to pay these taxes. The LLC may alter these rules by electing to be taxed as a corporation.
Must the LLC obtain a federal employer identification number (EIN)? A multimember LLC must obtain a federal EIN when it begins to do business, even if the LLC expects to have no employees. Use IRS Form SS-4 to apply for this number.
If you would like to learn more about LLCs, please contact attorney STEVEN G. STORRS at the Law Office of Steven G. Storrs, PLC at 269-945-2242 or via the online contact form to schedule a consultation
*This blog is intended for informational purposes only and does not constitute legal advice. Please consult an attorney before making important decisions regarding your individual situation.