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Limited Liability Companies: The Basics

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When in comes to Business and Corporate Law, limited liability company is a form of business entity used to shield a business owner’s personal assets from the risks of a business.

Under Ohio law, it is a hybrid of both a corporation and a partnership which limits the liability of its owners while allowing flexibility in operation and management.  The limited liability company is less formal and provides more flexibility than a corporation yet still provides the same liability protection.  Further, it passes income to its owners with no tax at the entity level.

The limited liability company (commonly referred to as “LLC”) is authorized by the Ohio Revised Code and may be formed by one or more persons by filing Articles of Organization with the Ohio Secretary of State. It may be formed for any purpose for which individuals lawfully may associate themselves.

Business and Corporate LawA "member" of a limited liability company is a person whose name appears on the records of the limited liability company as an owner of a membership interest.  A person can either become a member when the limited liability company is formed or at any later time that is specified in the records of the company.  

Generally, members of a limited liability company are not personally liable for the debts and obligations of the company; however, they will be liable for their own acts and omissions. 

Creditors of the LLC cannot pursue the personal assets (house, savings accounts, etc.) of members to pay business debts. For this reason, the name of a limited liability company must include the words, "limited liability company" or an abbreviation like "LLC" or "limited."

A "membership interest" means a member's share of the profits and losses of a limited liability company and the right to receive distributions from that company.  Membership interests are acquired through a contribution which may be in the form of cash, property, services rendered, or a promissory note.

The “operating agreement” is the governing document for any limited liability company.  It can be drafted specifically to the circumstances of the members and their business. The operating agreement will outline whether the limited liability company will be managed by all of the members or by managers who may or may not be members.  It will also outline the process for distribution of profits, losses, income, gains, deductions, and credits among the members.

The operating agreement will also outline the methods by which a new member becomes part of the company. Although there are no specific statutory requirements for meetings, the operating agreement usually provides for annual meetings and specific voting procedures.

A limited liability company is required to keep a number of documents at its principal office including all a current list of the members, a copy of the articles of organization, a copy of any written operating agreement, copies of federal, state, and local income tax returns and financial statements for the three most recent years.

In all cases, LLCs receive the benefit of pass-through taxation. This avoids what is called corporate double taxation in which corporations must pay income tax on its profits and then pay additional taxes on its disbursements to owners.  LLCs pay tax once on the owners’ personal income tax returns.  Limited liability companies with only one member are treated as sole proprietorships for tax reporting purposes.  The single member will report the limited liability company's income and losses on Schedule C of his personal tax return. 

Have questions about forming a limited liability company?

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Michael Laribee is a partner in the Medina law firm Laribee & Hertrick, LLP.  This article is intended to provide general information about the law. It is not intended to give legal advice.  Readers are urged to seek advice from an attorney regarding their specific issues and rights.

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