An LLC structure chart provides a choice between an informal or formal organizational structure.3 min read updated on January 01, 2024
An LLC structure chart provides a choice between an informal or formal organizational structure.
General Description of an LLC
An LLC, or limited liability company, is a business entity that is known for its flexible structure.
Similar to a corporation, an LLC is separate from its owners and therefore shields them from having personal liability concerning the debts of the business.
Although the formation of an LLC is more strenuous than that of a partnership or sole proprietorship, it is less complicated than operating a corporation.
Another difference between LLCs and corporations is that the earnings and losses of an LLC are reported on the owner's individual tax returns, whereas a corporation pays its own taxes.
It's a common misconception that LLC stands for limited liability corporation, but it is actually quite distinct from a corporation.
Overall, an LLC is much easier to create and operate than a corporation.
An LLC can be structured around the following based on the needs of the business:
- Number of owners
- Type of managementand organization
- Tax planning strategies
Limited Individual Liability
"Limited liability" means that owners of an LLC are protected from being personally responsible for the debts of the business. In other words, the owner's personal assets cannot be acquired by a creditor to satisfy a claim against the business. However, the money that the owner has personally invested in the company may still be at risk.
Limited Liability Exceptions
Like corporations, the limited liability feature provided to the owners of an LLC is not guaranteed in all situations.
Owners of an LLC may be held personally responsible if they commit any of the following actions:
- Openly hurt someone
- Provide a personal guarantee on a defaulted loan or debt for the LLC
- Neglect to submit taxes from employees' earnings
- Purposefully cause harm to the business or others due to illegal or negligent actions
- Act as though the LLC is a personal asset rather than a separate legal business
It is important to note that if the owners do not handle the LLC as an independent legal entity, a court can choose to declare that the business is not truly an LLC, which would mean the owners are liable for the actions of the business.
To avoid the question of whether a business is truly an LLC, owners should commit to the following actions:
- Provide full and accurate financial information to outside parties
- Make sure that enough cash is invested to pay future expenses and debts of the LLC
- Keep the LLC completely separate from personal business by acquiring a federal employer identification number, opening a separate bank account, and avoiding the recording of personal finances with business finances
- Provide validation that the LLC is a separate entity by constructing an operating agreement
Additional Protection
It is recommended that owners invest in an acceptable liability insuranceso that it can protect their personal assets in the event that the limited liability feature is void.
For example, liability insurance would ideally protect a physical therapist who unintentionally injured a client while providing services.
Liability insurance is also useful if a court chooses to overlook the role of limited liability.
Additionally, liability insurance can shield the LLC's assets from the following actions:
- Lawsuits
- Claims
However, in situations where an LLC does not pay its debts when due, insurance typically will not be of use in shielding assets.
Formation of an LLC
An LLC is formed in line with the rules of the state in which the business is established.
One of the first steps includes filing the business's Articles of Organization, also known as Certificate of Organization or Certificate of Formation, with the proper state agency.
The cost of filing can vary anywhere from $100 to $800.
Often, states will provide an Articles of Organization form in which the owners of the LLC simply need to fill in the required information such as:
- The LLC's name and location
- Contact information for the LLC's registered agent
- Names and addresses of the LLC's owners
Owners of an LLC, also called members, can be involved in either a single-member LLC with only one owner or a multi-member LLC with a limitless amount of owners.
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