The Limited Liability Company (LLC) is a relatively new entity type that is available to business owners and investors, as well as families seeking asset protection opportunities. LLC's are characterized by the limited liability protection granted to their members (owners), like a corporation, but with the option of "pass-through" taxation, like a partnership. While an LLC combines the best aspects of corporations and partnerships, there are many potential complications and restrictions that must be observed when forming and operating an LLC.
Limited Liability Companies can have one or more owners, or so-called "members". An LLC "member" is similar to a shareholder in a corporation, or a partner in a partnership. An LLC is formed by filing a Certificate of Organization with the Pennsylvania Department of State, as directed under the Pennsylvania Limited Liability Company Law of 1994. Like all corporate entities, LLCs have certain requirements and restrictions on what words and terms may be used in their company names. To avoid a problem with a business name, your attorney should check with the Corporation Bureau prior to filing the Articles to see whether the desired business name is permissible under the law and/or is available (i.e., not taken by another corporation or LLC).
While most people compare LLCs to corporations, the LLC derives its general structure and operation from partnership law. Thus, much like general partnerships and limited partnerships are managed by their partners, an LLC can be managed either by its members or by a separate manager or board of managers. In comparison to a corporation, where the bylaws direct the governance and management of the corporation, the LLC is governed by its written operating agreement. Members may execute an operating agreement to provide for different classes or groups of members, to address actions including amendment of the certificate of organization or the operating agreement, and to give voting rights to certain classes or groups of members. Generally, the operating agreement details the requirements for operation of the LLC, conduct of meetings of members and/or managers, and restrictions on transfer of LLC membership interests (often called membership "units").
Because of the liability protection that an LLC offers to its members, which are similar to the protections offered by corporations, it is advisable for LLC members and managers to follow the formalities (including annual meetings, publication of organization, corporate minutes and resolutions, etc.) that a corporation must follow even though such requirements are not explicitly required for LLCs. However, unlike corporate bylaws, members of an LLC are afforded a lot of flexibility in the way the company can be managed through the operating agreement. It is because of this flexibility that many advisors prefer LLCs over corporations for single purpose entities by investors, or for small family start-up enterprises that do not anticipate many employees in their initial stages. 8/11
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