What Is A Limited Liability Company?
Video Transcribed: This is Isaiah Brydie with Urban Legal, coming at you with another video and this video is going to be all about limited liability companies, otherwise known as LLCs. Now we’re going to go ahead and premise this video by saying that most people consider a limited liability company to be the creme de la creme, as far as the type of business entities that you can create.
That’s because a lot of the aspects of the other business entities that we’ve been talking about, have all been merged into the limited liability company. It’s where you have a lot of their benefits and very few of the detriments that came with a corporation, or a limited partnership, or anything like that. So we’re going to go ahead and straight dive into this thing, and what do you need to actually create a limited liability company?
Well, you need to file your certificate of organization with the Secretary of State, with the proper filing fee, and in that certificate of organization, you need to have the name of the LLC, that name including the initials LLC or the words, a limited liability company. That’s in order to give people notice that they’re dealing with a entity where the members are indemnified personally from any liabilities. You need to have the address that the LLC is going to be operating out of. And you also need the name and the address of a registered agent.
So who makes up an LLC? Well, as a general matter, LLCs are formed by members. That’s what they are called, members. These are the people who make up the LLC. They’re the people who operate it. They’re the people who get paid dividends, I’m sorry, not dividends, they get paid profits at the end of the year whenever profits are distributed… Wow, that was a weird word. Distributed at the end of the year, or whenever.
How are these things done? Well, a limited liability company operates under what’s called an operating agreement. So the operating agreement is going to lay out things as far as members powers, as far as voting. The operating agreement may specify that these members have the power to vote on a certain matter and these members have the power to manage the company on it’s day to day businesses, and these managers just, or these members just stay silent and sit in the background. An operating agreement is the document that’s going to lay all those things out, a lot like the bylaws would in a regular corporation.
Going on with this theme, just on its face, a limited liability company is operated by the members. Each member has the full power to operate and manage and bind the LLC itself, to any transactions or any contracts absent any ulterior statements in the operating agreement, but like I said, the operating agreement cam limit management of the LLC to particular members and the members themselves can vote to have a member manager, who actually directs the LLC and its day to day business activities.
Distribution of profits. This is one of the actual benefits of having an LLC, because the distribution of profits is based on the actual member’s contribution into the LLC, so what you’ll see is that an LLC is like a buy-in entity, to where one member may put in a million Dollars to help to fund the LLC and then another member may put in 250,000 Dollars to help to fund the LLC. So the member who put in the million Dollars, their profits that they get distributed to them, will be substantially higher than the member who paid 250,000 Dollars.
On the flip side of that, any liability that may come across the members through the piercing of the corporate veil, which we’ll get to a little bit later, is also going to correlate with the contributions that each one of the members put in. So if you put in more contributions, then you’re entitled to more profits, but if there is a piercing of the corporate veil, you’re also entitled to more liabilities as well. So it’s a double edge sword.
Going to piercing the corporate veil, let’s first talk about indemnification. So again, going with this correlating matter with corporations, limited liability companies, their members are completely indemnified from any debts that the LLC itself might incur. Of course, just like with a corporation, they’re completely indemnified as long as there’s not a piercing of the corporate veil, which we’ll get into in a completely different video. I promise you guys. It’s a very important thing. But as a general matter, members are completely indemnified from being held personally liable for the debts of the LLC.
So what are some other powers that members have, other than managing the LLC? Well, members can actually bring derivative suits, a lot like shareholders in a company can, on behalf of the LLC, to enforce its rights or to keep it from being injured by adverse parties. So lastly, go into the benefits of an LLC. So again, like I said at the beginning, LLCs are considered pass through entities, meaning that they are only taxed when they distribute profits to the actual members. There is centralized management that happens there, so that you know and you have direct ties with the manager of the LLC and their day to day activities.
Again, this management can be localized to one member or multiple members and also too, it can be expanded, So where if you have multiple members and each one of them operates in a specific facet that they specialize in, each one of those members can then benefit the LLC as a whole, with being able to operate in their special matters.
Again, we also have indemnification, where you’re not held personally liable for the debts of the LLC and also going to some of the benefits that an LLC derives from general partnerships, is dissociation, where a member is free to leave an LLC, as long as that dissociation is not wrongful. So we’ll be looking at instances where the LLC itself will be substantially worse off because a member is leaving.
So, for example, if you have a member that entered the LLC into a contract and then two days later, that member leaves the LLC high and dry, then that could potentially be considered a wrongful dissociation, and the LLC may be able to bring an action against that member who’s trying to leave.
That’s LLCs in a nutshell. They’re really great entities. If you can create one, this will probably be the one to do, so yes, if you need any legal advice or any legal assistance, be sure to get in contact with me with the information below.