Almost any type of business can incorporate as a limited liability company, or LLC. Though an LLC can cover virtually any type of work, business owners form these organizations by filing with state authorities. As a result, laws governing LLC organizations can vary considerably from state to state.
Description
A limited liability company functions much like a proprietorship, but with many of the protections afforded to a corporation. When business owners file a limited liability company’s charter with the governing state agency, they create a legally independent entity. This new entity, the LLC, has many of the same rights and responsibilities as individuals have. The LLC can own property, enter into contracts, sue and be sued.
Business Types
Limited liability companies can operate almost any type of business, but there are a number of exceptions. In most states, according to the legal website LawInfo, an LLC must exist as a for-profit business; non-profit organizations cannot operate as an LLC. Similarly, neither banks nor insurance companies may operate as an LLC.
Some states have additional or more specific restrictions; in North Dakota, for example, an LLC registered in another state cannot operate a farm.
Professional individuals, such as doctors and lawyers, also are not allowed to operate as limited liability companies. The purpose of an LLC is to limit liability, and operating as an LLC could encourage these professionals to take more risks than they would as liable individuals.
Benefits
The primary benefit of an LLC is the protection that this business structure gives the business owners. An LLC's owners, known as "members," typically transfer their liability to the business. In this arrangement, the LLC may take on debt or perform activities for which the members are not personally liable.
Although owner protection under an LLC is similar to that of a corporation, limited liability companies typically face fewer regulations and requirements than their corporate counterparts do.
Considerations
Though LLC members enjoy a number of benefits, business owners should keep a few considerations in mind when forming a limited liability company. The IRS considers LLCs as “disregarded entities,” and taxation passes through the company as if it does not exist. This leaves members paying taxes on the company’s earnings as if they were personal income.
In addition, the liability protection extended to the company’s members is not absolute. In cases of apparent fraud or other malicious activities, courts can disregard the LLC and hold members personally liable for the company’s activities.
Finally, LLC organizations may not issue publicly traded stock. A limited liability company must raise capital through private investments.