Chapter 11 Business Organizations November 10th 2014 11 4 Limited Liability Entities Limited Liability Entities Learn about the development of limited liability entities Explore how limited liability entities are created Understand why limited liability entities are now heavily favored Limited Liability Company LLC Hybrid form of business that provides limited liability to owners while being treated as a partnership for tax purposes Members Owners of limited liability companies o Possible to create an LLC with only one member o Can be real persons or they can be other corporations or partnerships o Participate in day today management of the business Taxation is flexible can elect to be taxed as a corporation Formation of LLCs Articles of Organization are filed with the state agency charged with chartering business entities o Typically the Secretary of State Require only the name and contact information of the LLC and its legal agent o Can be done by any competent business professional without any legal assistance for minimal time and cost Formation of LLCs LLCs are not required to o Issue stock certificates o Maintain annual filings o Elect a board of directors o Hold shareholder meetings o Appoint officers o Engage in any regular maintenance of the entity Members enter into a written LLC Operating Agreement Operating Agreement Agreement usually written among LLC members governing the LLC s management rights and duties o Absence of an operating agreement makes it difficult to resolve disputes among members o Sets forth how the business will be managed and operated o Contains a buy sell agreement o Allows members to operate in their own accord but it can also be a trap for the unwary Disadvantages of LLCs Members have to be careful while interacting with LLCs due to the risk of piercing the veil Here are the most common ways the owner of a corporation or LLC can become personally liable o Signing a Personal Guarantee o Offering Your Personal Property as Collateral o Signing a Contract into Your Own Name and not in your representative capacity o Using Credit Cards or Personal Loans to Fund the Business o Fraud Misrepresentations or Sloppy Recordkeeping Fundraising can be difficult as it is for a sole proprietorship in the early stages of an LLC s business operations LLCs are not the right form for taking a company public and selling stock allows for one class of ownership only Limited Liability Partnership LLP Entity related to LLC o Designed for professionals attorneys architects accountants doctors etc who do business as partners o Allow partnership to pass through income for tax purposes but retain limited liability for all partner
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