What does LLC mean? LLC is short for limited liability company. Like a corporation, the owners, who are called members in an LLC, are not liable for business-related debts. Similar to a corporation, liability for business-related debts is limited to the assets of the LLC. LLCs are considered to be a hybrid of a partnership and a corporation.
Many people wonder what does LLC mean. For example, you see the words LLC after the name of a company, but don’t know what it is. Or perhaps you are getting involved in business. Or you just heard the term and are curious. Now you know the basic answer. Read on to learn more about how LLCs work.
What does a business owner’s limited liability for business-related debts mean? It means that the business owner is only liable to the extent of the value of his shares or interest. For example, John and Jane, spouses, established ABC LLC together for the purpose of operating a small neighborhood convenience store. John and Jane own a house together in Brooklyn. Under ABC LLC’s Articles of Organization, John and Jane contributed $20,000 each for a total value of $40,000. ABC LLC used John and Jane’s contributions to lease a small commercial space for its bodega in Brooklyn and started operating. Initially, ABC LLC purchased its inventory using cash. After a few months, ABC LLC was able to negotiate with its suppliers to pay on credit, giving ABC LLC 45 days from delivery to pay. Business was going well. Unfortunately, a pandemic hit, and ABC LLC was forced to close. It had lots of inventory and was not able to pay its suppliers on time. ABC LLC owed its suppliers a total of $100,000 for the goods. The suppliers filed money claims and received money judgments against ABC LLC. At that time, ABC LLC only had inventory worth $15,000 and cash worth $20,000 ABC LLC could not fully pay its suppliers. The suppliers now seek to attach John and Jane’s house in Brooklyn to use as payment for ABC LLC’s debt. Will this claim prosper? No, because John and Jane’s liability for ABC LLC’s debt is only limited to the extent of their membership interests.
Exceptions to limited liability
There are exceptions to the limited liability concept for LLCs and corporations. The court can “pierce the veil of corporate fiction” and make the business owners personally liable for business-related debts when the corporation or LLC: (a) engaged in fraudulent behavior; (b) failed to follow corporate formalities; or (c) was inadequately capitalized. In the example above, suppose that John and Jane used ABC LLC’s funds for their own personal expenses. John and Jane would withdraw from the cash register at any time they felt they needed the money. ABC LLC did not adopt any by-laws, did not have any formal meetings to discuss the business, and did not adopt any resolution before income was distributed to the members. Now, ABC LLC’s creditors are seeking to attach the house of John and Jane in Brooklyn as payment for ABC LLC’s debts. Will the claim prosper? Yes, the court may decide to pierce ABC LLC’s veil of corporate fiction because ABC LLC did not follow corporate formalities and ABC LLC can be considered simply as an alter ego of John and Jane.
Given these exceptions to limited liability, it is very important for business owners to be cautious in the operations of its business to ensure that the personality of the corporation is respected so that the veil of corporate fiction will not be pierced by the courts.
Difference between LLC and corporation
When one thinks about setting up a business, aside from wondering ‘what LLC means’, a business owner also considers what kind of entity to set up. There are many types of entities to choose from, such as a sole proprietorship, a partnership, an LLC, an S corporation, and a C corporation. Each entity has a different characteristic which makes it attractive to a particular business owner. For example, a person who is just engaged in the hobby of baking and sells her goods sporadically might want to operate under a sole proprietorship, the easiest entity to set up. The disadvantage of a sole proprietorship, however, is that the assets of the business owner are held personally liable for business-related debts.
The LLC and the corporation, although similar, have their differences. IRS now allows the LLC the option to be taxed either as a partnership or a corporation. When the LLC is taxed as a partnership, the profits of the LLC are deemed distributed to the members in proportion to their interests and the members pay for the income tax. In a C corporation, the corporation pays for its own income tax, and any distribution of profits to the shareholders by virtue of dividends are also taxed.
In terms of management, the LLC can be managed by its members or by one or more managers, depending on what is provided in its Articles of Organization. LLC management is less formal than the corporation’s. The corporation is managed by the board of directors, with its officers, such as the President, CEO, or Vice President, running the day-to-day business affairs of the company.
Generally, most business owners, when starting out, choose to establish an LLC due to ease and convenience. If you are wondering what an LLC means or are interested in establishing your own business, don’t be afraid to reach out to a lawyer who can help you incorporate or establish your own LLC, help you set up your employer identification number, or assist you in drafting standard employment contracts and other supplier contracts. Although there might be an initial cost, it will provide savings in the long run because you will have less legal disputes if your documentation is in order. If you are looking for what does an LLC mean and you are looking for legal representation, we at the Law Offices of Albert Goodwin are here for you. We have offices in New York, NY, Brooklyn, NY and Queens, NY. You can call us at 718-509-9774 or send us an email at firstname.lastname@example.org.