Limited Liability Company Rules

Forming a limited liability company is a challenging decision to make by many business owners. This kind of legal entity has the advantage to protect the business partners.

Nevertheless, you should know the rules before deciding to switch your business into limited liability company.

Running a business entails lots of risks to business owners and investors. That is why many business owners decide to switch their businesses into LLC in order to avoid the risks. Forming limited liability is one way of reducing the investment risks legally. In this legal entity the investors or business partners take the responsibility on the money invested in the company. However, they are not liable about the mistakes done in the business. This means that the investment is protected and at the same time reducing the possible risks. The law that governs LLC is similar to corporation thus there are some distinctive rules that should be taken into consideration when forming the limited liability company.

Basic Rules

The main objective of the forming limited liability company is to protect the investors from risks. This means that when something bad happens to the business, the owners are not liable about the funds they borrowed the money. For instance, if the LLC is composed of 4 investors and have borrowed $600 and they owed to pay $1000. Nevertheless, when the business collapses, the investors are only liable to pay $400 and the $600 is owed by the bank or any lending company they borrowed funds. This makes sense of putting the word “Inc.” at the end of the LLC name in such a way that the financial risks are dealt by the lending company.

Another rule that applies in limited liability entities is to let investors participate in the decision making of the corporation. This is completely different from the standard investment in which the decision is the responsibility of the business partner who ahs the larger financial stake invested in the business. Nevertheless, the participation has limitation according to proportionality. This means that any investor has only the opportunity to participate according to the investment he or she put in the business. Therefore, the chance to participate depends on how much an investor has invested because one stock is equivalent to one vote. That is why the more stocks you invested the greater chance you can influence in the decision making.

Unlike the standard investment, the LLC is a business entity that utilizes the principles of corporations and partnerships especially when it comes to tax advantages. Thus, it has its own accounting rules yet it also follows the basic accounting procedures. However, the accounting rules imply that the personal assets of the business owner are not part of the investment. That is why in the event that the business collapses, the creditors can only touch the business assets but not the personal assets of the owner.


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