A limited liability company (LLC) combines features of corporations and partnerships. This lesson explains who owns an LLC, how it can be managed, and how it can protect owners from personal liability. It also covers formation requirements and practices that help preserve that protection.
The owners of an LLC are called members. Members may be individuals or other business entities. An LLC may have one member or multiple members, and ownership is commonly described using percentages or units.
All flashcards
Who is a member of an LLC?
A member is an owner of an LLC. Members may be individuals or other business entities.
What distinguishes member-managed from manager-managed LLCs?
In a member-managed LLC, members take part in running the company. In a manager-managed LLC, members delegate daily operations to one or more managers.
What is an operating agreement?
It is an agreement that sets out how an LLC is organized internally, including matters such as management and members’ roles.
What does limited liability generally mean for LLC members?
Members generally are not personally responsible for the LLC’s debts solely because they own the company. The protection can be put at risk if the LLC is not treated as a separate entity.
Why should LLC owners keep personal and business funds separate?
Commingling funds can make it appear that the LLC is merely an owner’s alter ego and can threaten the liability protection the LLC is intended to provide.
Quiz questions
What are the owners of a limited liability company called?Answer: Members
Who may serve as a manager in a manager-managed LLC?Answer: A member or a professional hired to manage the company
Which documents are generally associated with forming an LLC?Answer: State-filed articles of formation and an operating agreement
Which practice can put an LLC member’s liability protection at risk?Answer: Mixing personal and business funds or treating the LLC as an owner's alter ego
Which statement reflects a common state restriction on LLC use?Answer: Many states restrict nonprofits, banks, or insurance companies from using the LLC form
Based on Entrepreneurship by Michael Laverty, Chris Littel (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.