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What Is a Limited Liability Company (LLC)?

Limited liability companies (LLCs) have been generating a lot of buzz in the news lately — and for good reason: where the corporation fails, the LLC prevails.

Think of the LLC as a merger of the partnership and the corporation, except it has the best of both worlds — all the good qualities of each and none of the bad. It offers full limited-liability protection to all the owners (like the corporation), yet has a pass-through tax status (like the partnership). In addition, the LLC has a second layer of liability protection that shields the business from any personal lawsuits that may befall you. And it doesn't stop there! The list of benefits goes on and on.

LLCs are relatively new entities. Therefore, they aren't so easy for some folks to understand at first. Even if you're familiar with corporations — or partnerships, for that matter — you still need to understand some new concepts and a few new terms.

The best and most basic way to understand an LLC is to think of it as a regular partnership, but all of the partners have full limited-liability protection. This means that the partners (the members) aren't personally responsible for the actions or debts of the company. This is huge! LLCs are more official than regular partnerships in that you have to form them with the state, and you can raise financing by selling off pieces of the company (the membership interests). But when all is said and done, LLCs were made to be easy. They are easy to understand and easy to run. Not to mention, if you make a mistake, the consequences aren't as dire as they would be with a corporation.

LLCs, like most entities, are subject to state oversight. The problem with this is that not all states are on the same page. So you'll need to do a little bit of research to make sure you're complying with the laws of the states you are transacting business in. This won't be too difficult, though.

Although in most states, more LLCs are being formed now than corporations, they are still a very new entity. Compared to corporations, which have hundreds of years of case law backing them up, courts still have a lot to decide about LLCs. When operating an LLC, know that some things are based upon assumptions rather than actual legal precedents, and this creates gray areas — and potential problems. After all, you don't want to be the unlucky guy stuck in the courtroom when everything you thought you knew about LLCs is overturned. The best way to avoid this is to have a great registered agent or accountant who stays abreast of LLC laws for you. Should any monumental shifts occur in how LLCs are treated, your advisor can fill you in so you can plan accordingly.

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