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February 17, 2011

Just what IS a limited liability company? Part 4. It's a separate legal entity.

[This is the fourth post in a seven-part series discussing the characteristics of limited liability companies and comparing them to the characteristics of corporations, general partnerships, and sole proprietorships. Here's the entire list.

Part 1. Background on sole proprietorships.
Part 2. Background on partnerships.
Part 3. Background on corporations.
Part 4. LLCs are distinct legal entities, separate from their owners.
Part 5. A limited liability company's owners are not liable for the LLC's obligations.
Part 6. Options for an LLC's management structure.
Part 7. Options for an LLC's tax treatment.]

iStock_000005422636XSmall.jpgTo set the background for a discussion of the basics of limited liability companies, we've discussed sole proprietorships, partnerships, and corporations. As we'll see, a limited liability company shares some characteristics with corporations and other characteristics with sole proprietorships (if the LLC has one owner, called a member) or partnerships (if the LLC has more than one member).

The first thing to recognize about a limited liability company is that it is a separate legal entity, apart from its owners. How does that compare to the other structures? First, a sole proprietorship is NOT a separate legal entity apart from its owner. If you're running a business as a sole proprietorship, you really ARE the business, and the business is you.

At the other end of the spectrum, a corporation is a distinct legal entity, completely separate from its shareholders. For example a corporation can sue and be sued in its own name, It can enter into contracts in its own name. And it can go into bankruptcy without dragging its owners with it.

In the middle of the spectrum is a partnership. Without getting into all the details, I'll just say that for some purposes a partnership has the characteristics of a separate legal entity, and for other purposes a partnership is treated more like the aggregate of all the partners.

So in this sense, a limited liability company is just like a corporation. It is a separate legal entity, apart from its members. It can sue and be sued; it can enter into contracts; and it can go into bankruptcy, all apart from its members. And all that is true even if the LLC has only a single member.

Next we'll discuss another way that a limited liability company is like a corporation -- the liability shield.

Continue reading "Just what IS a limited liability company? Part 4. It's a separate legal entity." »

January 22, 2011

Just what IS a limited liability company? Part 1. It's not a sole proprietorship.

[This begins a seven-part series of posts discussing the characteristics of limited liability companies and comparing them to the characteristics of corporations, general partnerships, and sole proprietorships. Here's the entire list.

Part 1. Background on sole proprietorships.
Part 2. Background on partnerships.
Part 3. Background on corporations.
Part 4. LLCs are distinct legal entities, separate from their owners.
Part 5. A limited liability company's owners are not liable for the LLC's obligations.
Part 6. Options for an LLC's management structure.
Part 7. Options for an LLC's tax treatment.]

Thumbnail image for 436459_79130934.jpgLimited liability companies or LLCs, particularly Indiana limited liability companies, will be a frequent topic of posts on this blog. To set the stage, I'd like to start with the most basic question: Exactly what IS a limited liability company? It will take me a few posts to go over the basics, but then I'll move on to more sophisticated topics.

Way back, a long time ago, when I was in school (probably high school, but I'm not sure), I was taught that there are three types of business structures: sole proprietorships, partnerships, and corporations. Even then, that was a bit simplistic because there were other types of businesses, but that covered most of the waterfront. Today, it doesn't come close because the most popular form for new small businesses is a limited liability company. However, the easiest way to understand what a limited liability company IS is to understand first what it is NOT. So let's start with sole proprietorships.

As I learned way back then, a sole proprietorship is the classic one-person business in which the owner and the business are one and the same, even if the business is operated under some other name. I always thought of Drucker's General Store on the television shows Petticoat Junction and Green Acres. (I told you it was a long time ago!) Most likely, Drucker's General Store was a sole proprietorship. Sam Drucker and his store were one and the same. In other words, anything the store owned, Sam owned. On the flip side, anything the the store OWED, Sam owed.

For example, if someone slipped and fell on a pickle from Sam's pickle barrel (I don't remember if Sam had a pickle barrel, but he MUST have had one!) and successfully sued the store, the plaintiff could take money not only from the store's cash register and bank account, but also from Sam's bank account - and maybe even his house. That's a disadvantage of a sole proprietorship. An advantage is that (unlike corporations, as well discuss later), the business itself does not have to pay income taxes. The income from the business goes straight to the owners Form 1040, on Schedule C to be specific, and the owner pays the taxes.

So a limited liability company is not a sole proprietorship. Next we'll discuss partnerships, another type of business structure that differs from an LLC.

Continue reading "Just what IS a limited liability company? Part 1. It's not a sole proprietorship." »