Limited Liability Companies – Why They Are Different From Corporations
There are many different types of business structures that one can choose from when setting up a business enterprise. Companies take many different structures and among them is the limited liability company (LLC) structure. As the name suggests, the company owners are only liable for the business operations up to a certain level. In other words, the business entity is recognized by law as a separate entity from its owners. The enterprise has its own identity, different from that of its owners. It can be sued and it can as well sue other parties.
However, it should be noted that an LLC is different from a corporation in the sense that, it often favors ownership by individuals, unlike a corporation which must be run by a board of directors. Sometimes and under dire need, the limited ownership of the owners of a limited liability company may be overlooked by a court when there are cases of fraud or misunderstanding that require a deeper analysis and more responsibility on the part of the owners. To become an owner in a limited liability company, one is required to declare a membership interest. This is done through buying some units of ownership from the company, otherwise known as shares.
Shares are classified into various categories, which to a very large extent dictate the extent to which the shareholder can participate in the companies activities. For example, a passive shareholder is not allowed to become a signatory in the companies bank account. Other types of shareholdings determine the roles and the extent to which a shareholder is limited in the affairs of the company. The proportion of ones membership interest also to a large extent determines the management responsibility that a shareholder is entitled to.
In some states however, managers are appointed by the members or shareholders. The appointed managers form a board of managers and they are responsible for overseeing the day to day running of the company. This is known as a manager-managed arrangement. However, where all members are perceived as having equal management rights, the arrangement is known as member-managed.
For a limited liability company to be recognized by law as a legal entity, it must be registered with the registrar of companies of the state in which it operates, or with the office responsible with the registration of business entities. The document that proves the recognition of the LLC by the law is known as the Articles or Certificate of Organization. With the certificate at hand, the owners may operate in the sate in which they received the certificate, or in another state. The certificate contains what is known as an Operating Agreement, which defines the roles and responsibilities of each of the members. It is a contract of agreement between the members and is usually kept in the custody of the members and not the government office in charge of registration.
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