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Limited Liability Company (LLC)

What is a Limited Liability Company (LLC)?

A limited liability company (LLC) is a business entity. A variety of business entities, or forms, exist in the United States. Other examples of business entities include partnerships, and corporations. Under the law, if someone files a lawsuit against a corporation, and the suit is successful, the corporation pays money out of the corporation's assets. The individual members' and owners' own assets are not “touched.” 

This means that the owners of the corporation are not personally liable for the corporation's debts, or for damages awarded against it in a lawsuit. One of the downsides of a corporation is so-called “double taxation.” This means that corporate profits are first taxed to the corporation as they are earned. These profits are then taxed to shareholders, as capital gains income, when the shareholders receive dividends. A limited liability company offers the advantages of a corporation in that the owners' individual assets are shielded from creditors and legal claims made against the LLC. 

In addition, LLCs, like partnerships, are not taxed at the “entity level.” This means that unlike corporations, they do not pay taxes as an LLC. The only taxes paid are paid by individual members who have earned profit. There are downsides to organizing as an LLC. The liability of LLC structures is such that owners can be sued for their own negligence.

How is a Limited Liability Company Different from Other Business Forms?

LLCs are different in form from other common business entities. Unlike corporations income, LLC income is only taxed once. In other words, the income “passes through” the LLC, and is only taxed at the individual member level. Partnerships, sole proprietorships, and limited partnerships, also have this tax structure. Limited liability companies differ from corporations in terms of ownership structure. LLCs are owned by individuals, while corporations are owned by shareholders. 

LLCs differ from both partnerships and sole proprietorships in terms of liability. Partners in a partnership are personally liable for debts incurred by the partnership. These debts include debts incurred by another partner. This means that if a partnership owes money to a creditor, the creditor can “come after” the individuals' own individual real and personal property to satisfy the debt. LLC owners generally are not personally liable for liabilities or debts incurred by the LLC. This fact allows for LLC owners to manage the business without having to worry about losing their own assets.

Who Should Form a Limited Liability Company?

Individuals who want to own a small business should consider forming an LLC. Forming a LLC protects individual assets, limiting liability to the LLC's own resources. By forming an LLC, a small business owner, if sued, will not have to pay out of personal assets. Individuals who are interested in forming a business with minimal paperwork and costs should also consider forming an LLC. LLC formation requires filing a document called “articles of organization,” and a fee, with the state. 

This fee is typically smaller than the fee required for forming a corporation. LLC formation usually requires less paperwork to be filed with the state, than does corporation formation. In addition, keeping track of LLC income and expenses is relatively easy. Under an LLC, separate tax return filing is not required. Instead, members and managers report income and expenses on an individual tax return.

LLC management can also be fairly simple. An LLC with two or more individuals can develop an operating agreement. In this agreement, the members include details about how the LLC is governed, including how profits will be allocated, and what members' votes are needed for specific actions. The operating agreement can also address how the LLC may be dissolved, or shut down. The operating agreement may also provide rules for how disputes among LLC members are to be resolved. The operating agreement may address what happens if an LLC member dies or becomes incapacitated.

What is the Process for Forming a Limited Liability Company?

Forming an LLC requires following a series of steps. These include:

  • Determining who will be members of the LLC.
  • Creating a unique business name.
  • Filing the articles of organization. These documents are usually filed with your state's  Secretary of State.
  • Filing an operating agreement, if required by state law.

What Are the Requirements for an LLC?

New York has several requirements for LLCs that are enforced by the New York Secretary of State. Even though an LLC does not need to be formed by a member, it needs to have at least one member. The name for an LLC that does not offer a professional service must include “Limited Liability Company”, “L.L.C.”, or “LLC”. If the LLC does offer a professional service, such as veterinarian medicine or dentistry, then the name may end with ”P.L.L.C.”, “PLLC”, or “Professional Limited Liability Company” instead. Additionally, the name must be distinguishable from other existing names for companies that are registered in the state. There are also several words and phrases that are not allowed to be included in an LLC name in New York, such as “urban development,” “corporation”, and ”lawyer”. A comprehensive list of these prohibited words and phrases can be found in Section 204 of the New York Limited Liability Company Law.

An LLC is also required by New York law to adopt a written Operating Agreement establishing rights and duties of the members within 90 days of existence. Another thing an LLC must decide on is which county under whose jurisdiction it wants to be. In order be able to operate your company as an LLC in New York, you will also need to file the correct paperwork with the New York Secretary of State. Once you have filed all of the necessary paperwork, you must publish a notice of the LLC's existence in one weekly newspaper and one daily newspaper for six consecutive weeks, unless the LLC is a theatrical production company.

What Does the LLC Protect? What Does It Not Protect?

While the LLC form protects members' personal assets from a lawsuit, the situation is different if the lawsuit involves a claim of LLC member negligence. If a court determines an LLC member has acted negligently, the member can be individually liable for that negligence. An LLC member is also individually liable for intentional torts. 

For example, if an LLC member commits a battery during negotiations with another business entity, the LLC member is individually liable for that battery.

When Would Members of the LLC Be Personally Liable?

The LLC form protects owners from personal liability for wrongdoing committed by other members, during the course of business. If the wrongdoing is committed in the course of business operations, the LLC, not an individual member or owner, is on the hook.

Individual members are personally liable, if they injure someone during the course of business due to negligence, commit fraud in the course of business, and if they steal LLC assets. 

To cover the costs of lawsuits alleging negligence, LLCs commonly purchase general liability insurance. This insurance covers the costs of those injuries. Therefore, business assets need not be converted to cash to satisfy a lawsuit judgment. Negligence can be committed by individual managers, members, and employees. In negligence lawsuits, the plaintiffs can seek large sums of money. 

If the LLC does not have general liability insurance, and has insufficient assets to pay damages, the LLC may be forced to close. LLCs run by professionals, called professional limited liability companies (PLLCs), should consider purchasing both general liability insurance as well as professional liability insurance. Examples of professional liability insurance include attorney and doctor malpractice insurance.

What Benefits Does New York Give to an LLC?

Unlike most states, New York does not require LLCs to have a registered agent. Rather, the Department of State serves as the agent for all LLCs within New York, meaning that it is one less thing that you need to worry about when looking to register your LLC in New York.

What Disadvantages Does New York Give to an LLC?

Each LLC in New York must file a Biennial Statement every other year. Failing to file a Biennial Statement will result in the failure being reflected on any certificates of good standing that the LLC may request and may even result in the LLC being charged a $250 late fee.

Who Owns the Property of a Limited Liability Company?

A limited liability company (“LLC”) is a type of business organization in which its members can enjoy the limited liability advantages offered by corporate business structures, while at the same time, can employ the management style and obtain the tax benefits of a partnership. 

Unlike members of a general partnership, however, the members of an LLC cannot be held personally responsible for any liabilities or debts incurred by the business. This means that any legal actions and/or creditor claims must be filed directly against the LLC, as opposed to its individual members. 

Members of an LLC also have the option to choose how they want to be taxed. For instance, the main issue with corporations is that both the business and its owners can be taxed. This feature of C corporations is known as “double-taxation”, which exists because of corporate tax laws. In contrast, there are no LLC tax laws. Thus, LLC members can avoid the double-taxation problem by electing to be taxed as a partnership or S corporation. 

These characteristics, namely, the limited liability protections and tax benefits, are what make an LLC a particularly useful business structure when it comes to owning and transferring the property and/or assets of an LLC. For instance, suppose an LLC purchased property and the deed to that property was in its name. The property is then transformed into apartment units that get rented out to tenants. 

Now, if one of those tenants has a party and a guest gets injured on the premises, the guest can sue the tenant, but it is more likely that they will sue the LLC for their injuries. Since an LLC formation provides its members limited liability protections, the members themselves cannot be personally named in the guest's lawsuit and thus cannot be held responsible to pay for their damages. Though the LLC can be named in the lawsuit and held liable for damages.

In continuing with the rental property example, this also means that any income generated from tenants renting out those apartments can bypass double-taxation laws and simply be claimed on personal tax returns because of the tax benefits of LLCs. Additionally, since individual members must file taxes for LLC revenue, this also will make it easier if they decide to gift LLC property interest to their family members in the future.  

One other important trait that has not yet been mentioned, is that an LLC is considered a person for legal purposes (i.e., an entity). Therefore, LLCs can do many of the same things that a person can do, such as enter into a contract, file a lawsuit, and of course, own and purchase property. Accordingly, the answer to the question of who owns the property of an LLC is the LLC itself, not its members.

Who Can Transfer Property in a Limited Liability Company?

As previously mentioned, an LLC is capable of owning and transferring property. However, in order to purchase, own, or transfer property out of LLC entities, a real person must be granted legal authority to sign the actual property deed and title. Thus, some individual associated with the LLC must be appointed to carry out property transactions, or else the property transfer will be considered invalid. 

The following parties can be appointed to transfer property out of LLC entities:

    • Members of the LLC: In general, a deed to transfer property owned by the LLC must be signed by all LLC members. There is one exception to this rule. If the LLC has a provision in its operating agreement that specifically states that not all members are required to sign a deed to lawfully transfer LLC property, then the signature of only some members may make the deed valid. 
      • An LLC operating agreement can also provide the names of specific individuals that it authorizes to sign property transactions on its behalf. 
    • Managers and Officers: If the LLC operating agreement created and assigned managerial or official roles to certain individuals, they may be given authority to sign off on a property transfer as well. In this scenario, a deed used for an LLC property transfer must be signed by either two managers or two officers (whichever applies).  

The parties listed above are the most common groups of individuals who are typically given authority to sign off on LLC property transfers. However, these groups may change based on the terms of a particular LLC's operating agreement. Authorized parties may also vary according to state law requirements. 

Finally, it is important to note that transfers of LLC property and/or assets can only be carried out to satisfy the debts of the LLC. This is especially true when a transfer involves large amounts of LLC property or assets. Thus, it follows that an individual LLC member may never transfer property for personal gain. 

How Are Members of a Limited Liability Company Related to The Property?

In the event that property of the LLC is transferred or an issue arises over the ownership of the LLC property, it is important that LLC members know their property rights. One significant right that LLC members enjoy is that regardless of whether the transaction involves ownership or a transfer of LLC property, all LLC members must share in the profits received from that transaction.

LLC members also have a right to the interest of all LLC property and/or assets. Thus, although individual members may not personally take any actions concerning the property or assets, their interest in that property or assets can be transferred to others or passed down as an inheritance. 

One final important item of note regarding LLC members' property rights is that a single member is only allowed to transfer their interest in the LLC property or assets if they obtain the consent of all other LLC members. However, this action is rarely the type of issue that leads to a legal dispute.  

What is a Limited Liability Limited Partnership?

A limited liability limited partnership (“LLLP”) is a type of business entity that a person can select as an option when setting-up their new company. More specifically, an LLLP is considered to be a form of a limited partnership (“LP”). It provides its general partners with the same kind of liability protection as those offered in a limited liability partnership (“LLP”).

For example, a person starting a business may choose to structure it as an LLLP, a corporation, a general partnership, a limited liability company (“LLC”), and so on. One of the main reasons for selecting a particular type of organization is for tax purposes.

Other reasons may depend on the kinds of benefits that a person can receive, the advantages that the partners may have, and the primary purpose of the business.

LLLP organizations are one of the newest structures available for people starting a business. They require one or more general partners and are mostly made up of limited partners. Similar to an LP, a general partner is responsible for managing the LLLP, whereas a limited partner is usually only involved in an investor capacity.

Like all the other business entities, LLLPs also have different requirements depending on the state. This generally includes what is necessary to form the company, the kinds of documents to file with the state, and having to pay various filing fees.

One important thing to keep in mind about LLLPs is that they are not available in every state. Therefore, before you elect LLLP as the type of business entity for your organization, you should speak with both a tax advisor and a business attorney. A business attorney will be able to provide advice about whether an LLLP is right for you and if it is available as a business option in your state.

Who Forms Limited Liability Limited Partnerships?

LLLPs are not the most common type of business entity. As previously mentioned, the reason for this is because it is a new form of entity that is not yet recognized in every state. In general, LLLPs are usually created by businesses associated with the real estate industry.

For example, investors may choose to form an LLLP when constructing a hotel chain or a number of commercial buildings. An LLLP gives them certain advantages and protections that are not provided by the other entities, such as being let off the hook for personal liability.

In other words, they may lose their investment money, but they cannot be held personally liable for debts owed or unpaid taxes that belong to the LLLP. Unlike some of the other entities, this benefit can be exercised by both the limited partners to the LLLP and the general partners.

Some other examples include publishing firms, car dealerships, asset management companies, and as an outlier in the media industry, even CNN.

What are Some Differences Between a Limited Partnership (LP) and a Limited Liability Limited Partnership (LLLP)?

As discussed above, LPs and LLLPs are similar in that they both have to have at least one general partner and some number of limited partners. In each of these types of entities, the limited partners are only liable for their investments and they are not liable for any of the debts or obligations of the partnership itself.

In contrast, under an LP formation, the general partner will be equally responsible for debts incurred by the partnership as well as can be held personally liable.

On the other hand, under an LLLP formation, the general partner can no longer be held personally responsible for debts incurred by the partnership. They have a figurative shield of “limited liability.” This also means that they will not be liable for the negligence or misconduct of the other general partners.

What are Some Differences Between a Limited Liability Partnership (LLP) and a Limited Liability Limited Partnership (LLLP)?

An LLP differs from an LLLP in that the LLP does not have any limited partners. A good way to remember the difference between an LLP and an LLLP is that an LLP is a type of general partnership with limited liability protection.

In contrast, an LLLP is a limited partnership where both sets of partners receive limited liability protection.

How is a Limited Liability Limited Partnership Created?

Again, since LLLPs are the newest type of business entity, it has not been adopted yet by every state. In the states that have adopted LLLPs, it can usually be formed by adhering to a state's requirements, which are typically set out in one of the following two statutes:

  • A state statute that directly authorizes the creation of an LLLP; and
  • In accordance with the state statute, an LP can file for limited liability protection for its general partners, which will transform it into an LLLP.

What is an Easy Way to Dissolve a Limited Liability Company?

In general, the process of dissolving a company typically involves filing specific paperwork with the same state agency that originally formed the company and making sure that all debts of the company have been satisfied. 

When it comes to dissolving an LLC in particular, there are a variety of methods that members can choose from. The easiest of these methods is when a member dissolves an LLC by will. In other words, a member can trigger the dissolution of an LLC by voluntarily giving up their rights in the business. This means that the member will no longer be able to make decisions that affect the business and they will be stripped of any governance or management duties. 

A member who voluntarily chooses to terminate their relationship with the LLC will also not be allowed to receive any financial or managerial benefits from the business. However, the actions of one member will not necessarily dissolve the LLC in its entirety. This simple method is only used by a member who no longer wishes to remain part of the LLC. 

Thus, as long as no state laws or company bylaws say otherwise, the LLC can continue to exist without that member. 

What are Some Other Ways You Can Dissolve a Limited Liability Company?

In addition to the above method, there may be several other ways and/or reasons for dissolving a company. For instance, members of an LLC can dissolve their entire company (as opposed to removing a single member of the LLC) by voluntarily electing to end their relationship with the business. This method happens to be one of the most common ways in which LLCs are dissolved.

Another way that an LLC may be dissolved is when an important member of the LLC either passes away, voluntarily withdraws from the business, or ends their relationship with the LLC for some other reason. If this occurs and no other members are capable of or willing to run the LLC, then the LLC may naturally dissolve on its own. 

In certain states, it may be necessary to dissolve an LLC against the wishes of its members if the business goes bankrupt. To learn more about what happens when an LLC goes bankrupt, members can review relevant local and state laws, and/or speak to a local business attorney. 

One final way that an LLC can be dissolved is through formal legal procedures. Some states may require the members to vote. However, many states will consider an LLC dissolved when its members file all of the necessary dissolution paperwork with the appropriate parties prescribed by state law (e.g., government agency that formed the company, various tax agencies, and creditors). 

What are Some Things that are Included in the Filing to Dissolve an LLC?

As previously mentioned, each state has its own statutes that prescribe how to set up and dissolve an LLC. Although this generally means that the procedure will vary by state, the majority of states require that certain information be provided during dissolution. Thus, in order to properly dissolve an LLC, members must supply the following information and/or documents:

    • A record of the vote to dissolve the LLC (note that some states may require members to sign and file a resolution of their intent to dissolve); 
    • Depending on the state, members must file an Articles of Dissolution with either the Secretary of State, the Department of Revenue, or some other state government agency. Regardless of where a state requires business paperwork to be filed, the members must file the Articles of Dissolution with the same agency that was used to file their Articles of Organization.
    • Members must also give notice to any creditors that the LLC will no longer be doing business. The notification process may differ for each state, but generally the notice must state how to submit collection claims, the date of when creditors will be barred from filing claims, and a statement informing creditors that they will not be allowed to collect payment after the deadline expires. 
        • While state laws also differ on the amount of time that members have to give notice to creditors and to allow them to collect, it is usually around 90 or 180 days. 
    • A number of tax forms must be filled out and filed with both the Internal Revenue Service (“IRS”) and a state tax department, including a certification that says the LLC's filings are current and taxes have been paid. Forms will vary depending on how the organization elected to be taxed (e.g., corporation, sole proprietorship, partnership, etc.). This may include filing Form 966 (Corporate Dissolution or Liquidation) with the IRS.

Some items that may be useful to have on hand before the dissolution process starts include:

  • The registered name of the LLC;
  • The name and contact information of all LLC members;
  • The date of when the LLC was incorporated or organized;  
  • The reason or reasons for dissolving the business;
  • The date of when dissolution becomes effective; and 
  • Any information regarding pending lawsuits, debts owed to creditors, why those debts have not been paid yet, and what taxes (if any) are still owed by the business. 

What Happens to the Assets and Debts of an LLC When It Dissolves?

When an LLC dissolves, the members may still need to handle any remaining assets and/or outstanding debts. In regard to assets of a dissolved LLC, they may be distributed to LLC members in any manner that the members agree on and see fit, or alternatively, by the method that is provided in the terms of the LLC's original operating agreement. 

Although LLC members may request that a court distribute the business's assets, this is an extremely rare occurrence. In general, members do not typically ask the courts to intervene since they usually already know the exact amount that has been invested by each member into the LLC. Additionally, members may also not ask courts to get involved because there may be no assets left once they are done paying off the LLC's debts. 

Before any funds or assets may be distributed to LLC members, they must first be used to satisfy any outstanding debts of the dissolved LLC, as well as to pay off taxes and other creditors. If these debts are not taken care of during the dissolution process, the law may not consider the organization to be dissolved. 

Do I Need an Attorney for Help with LLC Property Matters?

As is evident from the above discussion, LLC property matters can become quite complicated due to the intricacies of the applicable law and complex legal procedures. These matters can pose even greater challenges when they involve transferring the ownership of LLC property. Dissolving an LLC can sometimes be a stressful and emotional event too. This is especially true in cases where your relationship with the other members has soured. Aside from this personal aspect, statutes that apply to LLCs often vary from state to state. This means that you will need to understand the exact laws and procedures used to dissolve an LLC in your area, which can be difficult to do without the help of a business attorney.

If you have any questions or concerns regarding LLC property or need assistance with a particular LLC property matter, it may be in your best interest to contact a local business lawyer for further legal guidance. An experienced business lawyer will be able to provide specific and clear answers to your personal LLC property questions. Your lawyer can interpret all relevant laws and explain what rights you have as an LLC member. Your lawyer can also review any contracts related to the LLC and determine whether there are any provisions that could affect your rights and/or legal matter. In addition, your lawyer will be able to identify both the risks and rewards associated with a certain LLC property transaction, and can provide advice about the next steps you should take. 

Finally, if you are in the initial stages of forming your business, you should also speak to a business lawyer about the benefits and disadvantages that LLCs can offer its members. Alternatively, if you already formed an LLC and you and your members want to convert to a different type of entity, your lawyer can also recommend another business structure that better fits the needs of your business.

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