What is a Limited Liability Corporation?

Limited Liability Company (LLC) is a cross between a Partnership and a Corporation. It combines the benefits offered by a Partnership with the advantages of a Corporation. Compared to the two, LLC is also easier to setup and confers less liabilities to its members.

This type of business arrangement was first introduced in Wyoming in 1977. But it was not until 1996 when the other states, including California, decided to follow.

How is it similar to a Corporation?

LLC possesses features present in a Corporation. One good example would be the limited liability its members are enjoying. Like shareholders of a corporation, the liabilities of the LLC members to their creditors and investors are only up to their respective shares and contributions in the company. It does not extend to their personal assets. Hence, once the creditors of the LLC have exhausted the latter’s properties, it cannot anymore collect or go after its members, except only when such members acted in bad faith.

How is it similar to a Partnership?

Yet it is somehow similar to a Partnership because the LLC members are given more lenience when it comes to their profit or loss distribution. Members can stipulate whatever form or rate of profit distribution they want to adopt.

Another similarity would be its simplicity. A LLC, like a Partnership, is easier to set-up.

Finally, members of the LLC are treated as partners by the IRS and are being taxed by the taxing authority individually.

What are its Advantages?

1. Since the members are taxed at a personal level, double taxation is avoided.

2. It requires less paperwork compared to a corporation.

3. Even if the LLC goes bankrupt, the properties of its members will remain untouched.

4. Members are free to decide on their profit distribution.

5. It is easy to setup and easy to manage. It is ideal for small entrepreneurs.

6. It attracts foreign investors because of its uniqueness.

What are its Disadvantages?

1. Due to its newness, there are still few statutes governing LLC establishment. It only adopts applicable statutes governing partnerships and corporations.

2. Laws governing LLC may vary from state to state, which complicates the business. Absence of a stipulation in the agreement clause regarding its life extension would cause the LLC an expiration of its term.

3. LLC has no perpetual existence. Absence of a stipulation in the agreement clause extending the life of the LLC upon expiration of its term, when one of its members die or withdraws would cause the extinguishment of the LLC when such events happen.

How is it established?

Being a recent innovation in the business world, particularly here in Los Angeles, California, most of the investors or businessmen do not yet understand the concept of the Limited Liability Corporation.

For Limited Liability Corporation Establishment, it is judicious to seek advice from a Business Lawyer who can help you construct the agreement, by-laws, property distribution agreement, rules and regulations, and other complicated administrative matters.

With the assistance of a proficient Business Lawyer, you can be rest assured that all matters relating to the establishment of the LLC would be done in accordance with the law.