So what is a limited liability company?
Well first of all it's limited liability
company, many people make the mistake in
the name of thing calling it a limited
liability corporation it's not a
corporation it is a limited liability
company and it's a special form of
entity recognized by States and it's
extremely common for small to mid-sized
businesses because of the ease of
formation the lack of formal maintenance
requirements and the limited liability
protection that is offers. So let's go
through each of the elements real quick
of the limited liability company
so you can understand the nature of this
business entity.
So first is creation, so it again it has
to be filed with the Secretary of
State's office in the and the state
recognizes the limited liability company
as a business entity within the States,
so you go through the filing process,
selecting the name, etc, and the you
organize it with the state and the state
gives you a certificate of organization
for the entity. Now there are no meeting
requirements, etc, there is generally a
requirement that there be a central
location where any correspondence with
the Secretary of State's office can be
maintained and any corporate governance
documents generally are held there but
there's very little requirements in that
regard, some states require a little bit
more than others but very little
requirements not required to have
business meetings etc, so a very simple
form to create and maintain.
Now continuity of this business again by
default when an individual leaves the
the limited liability company the
business well honestly the business has
very little continuity by default if an
individual leaves then their interest
the limited liability company the
remaining members have to make select or
determine whether they are going to
continue on in operations and if they do
they have to
would they or pay out the interest of
the disassociating member or the member
that passes away because the member has
rights in their interest in the business
or the value of their interest in the
business but you cannot pass
an interest to your say your spouse or
your child or something like that and
also they become a member of the LLC.
Generally ownership interest or the
ability to take part of be a part of the
business is limited to members and
that's generally controlled in the
organizational document which is is
called the operating agreement or the
LLC agreement very similar to the bylaws
in a corporation, okay, so there's very
little continuity in an LLC. Alright.
Next would be ownership and control, okay,
ownership the owners of the LLC are
known as members they're known as
members not shareholders members, okay, so
by default the members have an equal
ownership but generally there's an
operating agreement in place that
allocates a specific percentage of the
business in most states they use
something called membership units that
are similar to that's you would say a
stock share and they allocate this
number of units to each member of the
LLC in respect to their percentage of
ownership and that's their level of
ownership. Now what's unique about the
LLC is control, the members can make
one of two elections for the LLC, you can
elect to be more like a partnership and
the member manage that means any member
of the LLC manages or is entitled to
managing the LLC as if they were a
general partner in a partnership, okay, so
they have complete control the complete
ability to bind the business,
decision-making authority, etc, okay so
very very similar to a general
partnership. On the other hand those
members can elect to be manager
and if you're a manager managed LLC you
elect or a point or hire managers to
manage the LLC on behalf of the owners,
well this cuts off the ability of the
members to act on behalf of the business.
So they're not like general partners
anymore
now they're more like shareholders of a
corporation who don't act on behalf of
the business you hired someone
specifically to run the business. Now in
most cases the individuals that act on
behalf of the business are member
managers that is you've got so you've
got an LLC with ten members and you
elect to be manager managed you may hire
someone outside or you may hire two or
three of the members to act as managers
and they would act in a role in a
corporation similar to that of officers
of the corporation and they would run
the daily affairs of the LLC, so that's a
very important thing to understand
whether it's a member managed or manager
managed because you will want third
parties to understand this or know this.
So the members who are not managers
cannot act on behalf of the business and
it's not reasonable for third parties to
believe that these members can act on
behalf of and bind the LLC in contract
or subjected to liability in tort. Okay.
So next would be personal liability
whether limited liability company is
basically a separate entity from the
members, so each member of a limited
liability company has complete
protection of their personal assets from
liability for for the for business
liability. So if someone Sue's the
business and contractor tort or the
business creates a a debt in contract
and creditors look to the business to
satisfy that debt or liability, they
cannot look to the personal assets of
the members, so this is a very very
attractive entity form for
individuals starting a small or
mid-sized business because they are able
to cheat limited liability without the
located maintenance structure or
governance structure associated with say
a corporate entity status. Okay.
And now compensation now again that
differs whether your member managed or
manager managed, if your member managed
then it's just like a general
partnership and the interest the profit
at the end of the year is taxed to the
individual members commensurate with
their ownership percentage. Okay. So I own
20 percent and we make $100,000 well
taxed on $20,000 whether I receive it or
not,
so that is treated as my compensation
whatever my distribution interest is at
the end of the year whether the company
distributes it or not, okay, but if we're
manager managed that same principle is
true if I own 20 percent and we have a
20 a million dollar profit then I get
$200,000 as my distribution interest,
okay that would be my compensation as a
member owner. Well if we have managers
then they receive a salary we pay them a
salary so they would report that as
salaried income we're anything, so Sam a
member but let me give you example say
I'm a member and a member manager so I
get a salary of $100,000 a year but on
top of my salary treated as an expense
to the LLC the LLC had a million dollars
worth of profit and I'm a 20% owner of
the LLC. Okay. Well I would pay taxes on
my $100,000 salary but I would also be
subject to taxation on my 20% interest
in that million dollars or that $200,000.
Okay. So that's the general compensation
and taxation structure of the LLC
depending on which type you choose.
Now again on the taxation side there are
very complicated rules that apply that
at risk limitations passive active loss
rules etc, and whether an individual in a
certain situation is subject to
self-employment
on the money that passed the story that
that all changes in us be very
complicated, we'll have some later on
video lectures about it in other series
but in the meantime I recommend speaking
to a qualified accountant when making
this determination for a business entity.
Okay.