Limited Liability Company Law and Legal Definition

CHARACTERISTICS OF A LIMITED LIABILITY COMPANY

A limited liability company is a hybrid between a partnership and a corporation. Like limited partnerships and corporations, the limited liability company has a separate legal entity from its "members."

An LLC does not exist indefinitely. Traditionally, the articles of organization must specify the date on which the Limited Liability Company's existence will terminate. However, many states now allow an LLC to have a perpetual existence. Unless otherwise provided in the articles of organization or a written operating agreement, an LLC is dissolved at the death, withdrawal, resignation, expulsion, or bankruptcy of a member (unless within 90 days a majority in both the profits and capital interests vote to continue the LLC).

There are two ways to split voting power among LLC members: either each member's voting power corresponds to his or her percentage interest in the business, or each member gets one vote -- called "per capita" voting. Most LLCs agree to allot votes in proportion to the members' ownership interests.

DISADVANTAGES

LLCs are more expensive to create than a partnership or sole proprietorship.

State laws for creating LLCs may not reflect latest federal tax changes. Some states impose an income or franchise tax on LLCs.

One of the disadvantages of an LLC is that it does not allow ownership to be transferred through sale of shares in the same way as corporate stock ownership allows. In most jurisdictions, a membership may only be transferred or created with the consent of members having a majority in interest (excluding the person acquiring the membership interest), unless the articles of organization provide otherwise.

LLCs may abruptly cease to exist. Unless otherwise provided in the articles of organization or a written operating agreement, or the majority members in capital and profits vote to continue it within 90 days, an LLC is dissolved at the death, withdrawal, resignation, expulsion, or bankruptcy of a member. The LLC operating agreement can prevent this kind of abrupt ending to your business by including "buy-sell" provisions, which set up guidelines for what will happen when one member retires, dies, becomes disabled or leaves the LLC.

ADVANTAGES

Some of the benefits of an LLC include flexible ownership and management, protection from liability for owners, and tax advantages.

FLEXIBILITY