I have received a lot of inquiries about whether the use of a limited liability company llc shields a person from having to file for personal bankruptcy if the business is failing and has debts it cannot pay.

The answer to this depends on what you have done in your business.  First, if you had decided to form an LLC when you started your business and then transacted all business in the name of the LLC, then the LLC liability limitation provisions protect you from being personally liable for obligations under those business transactions.  For example, if you signed a vendor contract only in the name of your LLC, then the obligations including any payment ones are those of the LLC not you personally.

In times like these, where both large and small businesses are not making it, those that had formed an LLC are much better off because they are not generally personally liable for any business obligations.  If an LLC business is in dire straits and bankruptcy is the only answer, then it is the limited liability company LLC that files for bankruptcy, not you personally.

Now, if in your business transactions, you agreed to be personally liable for a business debt, this protection would not apply to those deals.  This is because you affirmatively agreed to personal liability for a business debt.

Overall, if you conduct business in the name of the LLC, this is a tremendous benefit of an LLC.  Most people do not think about business failure when starting a business but the LLC protections provide this substantial benefit in the event of a business failure.

Most limited liability companies are taxed as a pass through. So, I assume this question is based on an LLC that is not taxed as a corporation.

With pass through taxation, the LLC itself as an entity never pays taxes.  However, from an accounting perspective, all the accounting items that are relevant to the business are taken into account.

So, practically, you would take all your revenue, expenses, gains and losses for your business is and determine what the taxable income, if any, or the taxable loss of the business is at the end of the year.  You would apply all the tax rules, limitations, restrictions and benefits to these numbers.

The details of all the accounting items that are relevant to determining taxation are then set forth in a document which varies depending on whether your limited liability company is a single member LLC or a multi-member LLC.

For the single member LLC, the tax reporting and detail will be included in a Schedule to the single owner’s personal tax return.  The end number, if it results in taxable income, will be added to the single owner’s other income on his/her return for purposes of determining the overall tax liability.  If the business is actively run and there is a loss, then the single owner can take the losses to reduce his income tax liability on other income.

For the multi-owner LLC, the LLC includes the detail no an informational tax return – the Form 1065.  It then takes the bottom line income or loss and allocates it among the multi-owner members based on the provisions of the LLC Operating Agreement. Each member gets a form which shows his or her allocation of the LLC’s income or loss.

So, even though the LLC itself does not send a check to the IRS, the procedures and analysis for determining the taxable income or loss of the LLC business is done as a business entity.  But then the income or loss is passed through to the owners of the business to report on their individual returns.  The result of this is that the income of the business is only subject to one level of tax. And, in most cases, if there is a loss, a business owner can get a benefit by being able to take that loss to reduce tax liability on other income.

Today, a well know legal professor (expert in business organizations law) filed a brief in a landmark Florida case that addresses a fundamental single member LLC matter. If the court agrees with his position, this could mean the definitive end to any charging order protection for the single member LLC.

State LLC laws have never differentiated between a limited liability company that has one member and one that has multiple members when it comes to liability protection.  It is well recognized that every LLC provides a layer of protection stating that owners are not personally liable for business liabilities merely because they are owners.  This is known as forward liability protection.

However, an LLC in most states also offers what is known as reverse liability protection or charging order protection.  This protection basically states that if a member is personally sued for a non-business related obligation and is found liable, the creditors cannot take full ownership of the member’s LLC interest in the LLC.  The creditor’s rights are limited to the economic interests.  In effect, this allows the member to retain the control he had in the LLC business.

The philosophy behind the charging order is not really to give protection to the liable member but to protect other owners of the LLC from business disruption and problems.  They should not fall victim to one member’s personal liabilities by having to deal with an unknown creditor coming in and affecting the business by having management or voting rights.

Now this reasoning does not really apply in a single member LLC context because there are no other members to protect.  A well known bankruptcy court has nullified charging order protection in a single member LLC in the context of a bankruptcy.  While conservative legal practitioners interpreted this ruling to mean there is no longer charging order protection for a single member LLC, the ruling technically applied in only a bankruptcy context.

However, this Florida case addresses the matter in a non-bankruptcy circumstance and so its conclusions will have significant ramifications and applicability in the general area of LLC protection.

More details can be found at this link:

http://www.wmitchell.edu/news/articles/default.asp?articleId=11766&story=Professor-Kleinberger-files-brief-in-landmark-Florida-single-member-LLC-asset-protection-case

When starting an LLC, you should always spend quality time coming up with a proper name for your LLC  business.  Your first analysis should be business driven.  Come up with a name that will be suitable and advantageous for your business.

Most businesses will use their name as a brand to promote and advertise their products or services so this name becomes very important as you develop branding for your company.  However, for some businesses, the LLC name itself if not important as the LLC will be using other names (called DBAs) for their marketing.  For example, if a group of business owners get together to form an LLC to finance ventures, they may call the LLC ABC Holdings, LLC or ABC Investments, LLC.

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Once you have come up with one or several potential names you like from a business perspective, you must check to see if the names are available in the state where you intend on forming your LLC.  In every state, you cannot use a name that is already registered with the state by another business.  Thees rules differ in each state.  Some will only prevent use if there is another LLC using it.  Others do not allow a name if another LLC or corporation registered in that state is using it.  While a few even prevent you from using fictitious name filings that are the same as your intended name.

Now, the inquiry goes beyond names that are identical because many states disallow names that are similar to another name.  This gets tricky because some states are very anal about finding names to be similar while others are quite lax.

You can call your state agency to find out the best way to work with them on confirming name availability or some reputable online LLC formation services offer this service for a small fee or even free in some cases.  The LLC Expert offers a Free Name Search in most states: Just Click Here and look for the box on the right to conduct a name search.

Name search is just the first step when starting an LLC.  Make sure you understand this process and requirements and insist on a proper LLC formation to ensure you are gaining the personal liability protection afforded by this type of legal entity.

You should NEVER sign a business document or other contract on behalf of your LLC as owner.  This is because when you are serving as the person running or managing the business, you are not doing so in your capacity as an owner of the business but rather in your capacity as a manager or officer of the LLC business.

This is an important concept to get if you care about preserving the limitation of liability protection offered by your limitation of liability company.  You never want to do anything that implies that you are doing business in your personal capacity.

One way to evidence that it is the LLC and not you personally that is entering into a legal contract is to make sure you always use a standard title when signing an agreement.  The ideal scenario is to have your LLC appoint officers like a President and you can sign agreements as the President of your LLC. For some very simple management structures, if there are no appointed officers and your LLC is member managed, you can sign as Managing Member or if your LLC is manager managed, Manager.

Your legal agreements are very important to your LLC business as they outline the business rights and obligations with other parties.  So make sure you take the time to read them properly and have them reviewed by your attorney to make sure you are not legally binding your company to something unintended or unreasonable.

Unfortunately, the LLC laws of most states do validate oral llc agreements for a limited liability company. So, technically, an oral LLC agreement is valid.

There are some limitations under general contract law.  For example, there is the concept of the statute of frauds which requires that certain agreements be in writing. A recent Delaware court case involved an oral LLC agreement and held it invalid not under the LLC laws but under the statute of frauds/contract rules.

Practically and legally speaking, an oral agreement governing the relationship between LLC members and the operational requirements of a business is just a recipe for disaster.

Just think about it.  If there were ever a dispute or disagreement, then how can one side or the other prove what the actual agreement was between everyone? If it was oral, this means there are no documents or writings summarizing the final disposition.

You should NEVER have an oral LLC agreement.  In fact, I strongly recommend that in your written LLC operating agreement, there be a provision that nothing oral can ever be a part of the LLC governance.  Everything must be in writing.

The LLC agreement for your company provides the fundamental personality, rules and structure of the entire business.  It is like the user manual for your business.  Accordingly, the specific rules, provisions and processes should be spelled out and well documented.

From an LLC tax perspective, the default tax structure for a limited liability company is pass through taxation which means that whatever tax is owed gets passed through to the owners of the LLC.

At the end of the tax year, the tax items of the LLC are reviewed and it is determined whether the business made a profit or loss.  If it is a profit, then for tax purposes, the profit allocation is attributed to the members.  If there is only one member, that member will have to pay taxes on that profit amount through his or her persona return.  If there are multiple members, then the LLC Operating Agreement will dictate how the profit gets divided among the members and each will be responsible to report the profits amount allocated to them on their return.

It does not matter whether or not the LLC actually distributed those profits out to the members.  Determining taxation is a different process.  So, in the case where the limited liability company decides to keep all the profits in the business to reinvest in a later year, there could be a situation where members owe tax and did not receive any cash to cover the tax.  Some LLCs will plan for this by always requiring at least an amount to cover profits tax to be distributed to members.

Speak to your accountant about LLc taxation details for your business and working with him or her to arrive at the best reporting, allocation and distribution plan for your particular business situation.