Another benefit of a limited liability company (sometimes referred to as a limited liability corporation) over a sole proprietor business structure is that if an owner in the LLC dies, the business can still continue without any disruption in business operations.

With a sole proprietor, the person is the business and the business is embodied in the person.  Accordingly, if the person/owner dies, so does the business.  A limited liability corporation is its own separate person and is independent of any of its owners.  If one of the owners in an LLC dies, the LLC still remains in existence.

This is an important feature to have because the last thing any executor or administrator of a deceased person’s estate wants to deal with is the immediate termination of an otherwise profitable and ongoing business.

This is the benefit of business continuity and while many new entrepreneurs do not focus on this at the beginning of a business, it is an important feature to have when iin real life a member or owner dies or becomes incapacitated.  The continuity will help the business to maintain its profitability and value which in turn benefits the beneficiaries of the deceased owner.

Generally, when this question is asked it is two fold.  One, how are previously purchased equipment or previously incurred debt transferred to a limited liability company when an LLC is created later for a business.

Second, is it possible to not be personally liable for that debt after the transfer?

Question #1:  Yes, you can transfer any assets or debt to your LLC. You transfer assets with a document called a Bill of Sale and you assign debt with an assignment of the debt contract and obligation.  The LLC needs to agree to undertake the debt obligation by having its members formally approve this transaction.  The approval should be documented with a written resolution or consent.

Question #2: No.  Once you personally agree to an obligation, you cannot later get rid of that personal obligation by transferring he obligation to an LLC.  You remain liable.  The only way to change this is to get the other party (e.g., the lender or vendor) to agree to take you off as a liable party. In most cases, that party will never agree to this- it just does not make business sense.

The best approach is to create an LLC early and have your limited liability company be the contracting party or the borrowing entity from the beginning.  Please note that many banks will not lend money to a brand new LLC with no operating or credit history so you may end up being asked to personally guarantee the loan in any event.  Banks are conservative.  It is still worth your LLC being the borrowing entity (Even with the guarantee) as this is how you begin to establish credit for your LLC business.

Learn more about the limited liability company at The LLC Expert.

The answer to this depends on how the limited liability company is taxed. If taxed as a partnership/pass through (which is the default taxation for an LLC), owners of an LLC that also work for that limited liability company are generally not seen by the Internal Revenue Services as employees.

Rather, owners are categorized as self employed.  All income earned by the LLC business is seen as self employment income and each member is required to pay and withhold self employment taxes related to that income with the IRS. There is a maximum amount subject to some of the tax.  Now I have never found anything that prevents setting up an employment relationship but many accountants have told me that this has caused issues and resulted in having to unwind it to the self employment structure.  So, check with your accountant on how his or her recommendation as he or she is the person who will be preparing your tax returns and employment tax forms.

If the limited liability company is taxed as a corporation, then owners can be employed by the LLC entity and are treated like employees for all purposes of IRS taxes.

Regardless of tax structure, owners can be paid for their contribution to the LLC and can receive employee type benefits.  However, you should seek the advice of your tax accountant to determine the best way to structure the relationship between a member and the LLC.

A quick side note. There is technically no such thing as llc incorporation.  Unlike corporations, LLCs are organized or formed as opposed to incorporated. The result is the same though.  Each legal entity once created is a separate legal entity with its own powers, characteristics and limited liability. So, just to be precise, instead of llc incorporation you have llc formation.

When a person puts capital into a limited liability company in exchange for a membership interest, he or she has no legal right to get that capital back unless the LLC and the person otherwise agree to a guaranteed return in a written agreement.  If, on the other hand, a person loans money to an LLC, then the LLC (not the other members) has an obligation to pay back the loan per the loan agreement terms.

In either case, other members of the company are never obligated to personally pay back any capital or loans of another member unless there is some specific side agreement where a member agrees to this.  The LLC protection provision specifically states that no member is personally liable for the debts, obligations or liabilities of an LLC merely because he or she is a member.

HOWEVER, in practice, there are several situations where you could be personally liable to another member:

1. If you personally agree to pay it back at the time.  This is known as a personal guarantee and if this agreement was reached, then yes, you are liagle not under the LLC laws but because you legally agreed to it.

2.  There are securities related laws that you can personally be liable for if you violated them.  If you started your LLC and then went out and found or solicited investor and they put money into your LLC, there is some risk that they may later come back and said you provided false and misleading statements about the investment or the capital raising did not comply with securities laws. This area of liability is beyond the scope of LLC concepts and can get quite complicated.

If you are going to third parties to solicit investment in exchange for ownership interests in your LLC business, you must hire a good business and securities lawyer to assist you with the transaction.  Yuor lawyer will ensure that sufficient disclosured and paperwork are involved so that you will later avoid any personal claims for liability if the LLC business does not work out.

While forming an LLC entity itself is straightforward, the strucuring of relationships among members and investors can be complex and it is wise to get attorney help to protect you and your business.

Also just a side note, you mention INCORPORATE LLC.  The term incorporate is technically a corporation legal entity term and not one applicable to a limited liability company.  An LLC is organized or formed under state law.  It is an unincorporated entity that happens to have all the advantages and benefits of an incorporated entity (corporation). 

Because the LLC is an improvement upon the corporation for most small businesses, it is often referred to as an incorporated LLC, LLC corporation or limited liability corporation. Just a clarification.

If you have an existing limited liability company and now want to admit a new Member, you need to consult with the provisions in your LLC Operating Agreement to determine how to admit a new Member.  This Agreement governs the requirements and processes for your particular LLC when it comes to admitting a new Member to your limited liability company.

Generally (although this can vary based on the specific LLC’s rules), a vote of the Members will be required to admit a new Member and so a certain percentage of the current LLC members must approve.  Make sure all pre-admission requirements set forth in the LLC Operating Agreement have been met.

After approval, the LLC should make sure that the issuance of Membership Units to the new Member is in compliance with any applicable state securities laws. Security laws are beyond the realm of LLC laws but generally if the member being admitted has a pre-existing relationship with you and the LLC and will be active in the management and operations of the LLC, there should be no state limitations.

On the other hand, if the member is more like an investor and will be contributing substantial money or other property in exhange for an ownership interest, please check with your local attorney to determine if there are any securities related obligations.

Once security related issues are cleared, then, a document, commonly called a Membership Issuance Agreement should be prepared and signed by the LLC and the new Member.  And, finally, and most important, the new Member must sign a written document agreeing to be bound by the LLC Operating Agreement of the limited liability company.  The records of the LLC need to be updated to reflect the new Member.

If the Member is required to commit capital or services in exchange for his or her Membership Units, it is very important that these obligations be set forth in a writing signed by the Member.  In the event the Member is required to provide capital or services over time, it is a good practice to provide for a mechanism where the Membership Units are forfeited or transferred back automatically if the new Member fails to meet his obligations.  These types of arrangements can vary tremendously based on each situation so it is good practice to hire your attorney to properly document these transactions.

I get so many questions from members of an existing LLC about the ability to “get rid of” or remove another member from the LLC.

The ability of an LLC or another member to unilaterally remove another member is only possible if there is a right to do so in the LLC Operating Agreement of the LLC and the member to be removed has agreed to be bound by the LLC Operating Agreement.  This right can also be in another separate document as long as the agreement is in writing and the member to be removed agreed to that document by signing it.

Absent any provisions in a written document that provide for automatic renewal, one cannot unilaterally take back an LLC ownership interest previously granted to an LLC member.

An LLC Ownership interest is personal property just like stock in a corporation or any other personal asset you own like your car or a book you bought from the store.  No one can just come and take your car away from you or take any of your personal belongings unless you have signed an agreement agreeing to allow them to take it back.

The law in the US protects ownership and so once an LLC issues an ownership interest to a person and that person becomes a member, the ownership interest held by that member is personal property of that member and is only subject to any restrictions contained in the LLC Operating Agreement.

This issue is an important one though for multi-member LLCs.  If members of an LLC have disputes or otherwise do not agree on an LLC matter, sometimes the LLC will end up in deadlock which is not good for anyone.  So, the astute LLC owner should address this in the LLC Operating Agreement.

Similarly, some LLCs grant membership interests to a person with the assumption that the person will devote time and efforts to build the LLC business.  After issuance, what happens if the person does not do anything- does he/she still get to keep the interest?  If there was no agreement in writing providing for a forfeiture or a vesting based on the services to be provided, then yes, an outright issuance without any restrictions gives him/her an absolute ownership right.

In summary, it is important for all planning issues that an LLC or its members may face to be addressed at the beginning of an LLC arrangement in the LLC Operating Agreement or in other legal agreements between the LLC and its members.

A common method for allowing the automatic removal of a member is called a buy-sell provisions which allows the LLC to buy back the interests automatically at a FMV or a predetermined price.  These provisions can be quite complex and should be tailored to your LLC based on your specific LLC situation and your members.  Retaining a qualified attorney to advise on these matters is always recommended.

The word "Member" is used to describe a person or entity that has an ownership interest in a limited liability company.  Generally, a Member will own a certain number of Membership Units (similar to shares in a corporation) but an LLC can be set up where a Member owns a Membership Interest which is expressed as a percentage (e.g., 75%) of the limited liability company.

This question about rights and obligations of an LLC Member is a difficult one to answer because the LLC laws actually allow an LLC to define for that particular LLC what rights and obligations a Member has. So, the answer is that the rights and obligations are defined by the LLC governance documents- usually the LLC Operating Agreement.

This flexibility and ability to determine the rights and obligations is one of the great advantages of a limited liability company- it allows different businesses to cater its ownership, financial and governance structure in a way that best suits that particular LLC.

However, a great majority of limited liability companies do not require such tailoring and have a general and straightforward ownership and governance structure. 

In many limited liability company situations, an LLC Member has two types of RIGHTS: (i) economic rights and (ii) management/voting rights.

Economic Rights are the right to a certain percentage of the profits of the limited liability company.  Typically, this right is equal to what percentage in the LLC the Member owns.  So, if a Member owns 500 Membership Units and there are a total of 1000 Membership Units issued to all Members, that Member would get 50% of the profits.

Management and Voting Rights are determined with a similar formula.  When Members vote on LLC operational or transactional issues, a Member has a voting percentage which is typically based on the relative ownership he/she has in the total LLC.  Generally, in order for an LLC action to be approved, the action must be approved by Members owning a certain percentage.  The most common percentage is majority in interest which means at least 51% but for some LLCs, the percentage could be increased to whatever the LLC Operating Agreement states.

Again, the above examples of economic and management/voting rights are just typical examples but the LLC laws allow for these to be tailored for any LLC.  So, if you are starting an LLC, you need to think through these matters and determine what makes sense for your LLC business.  If you need assistance, it is always recommended you seek the advice of a competent LLC attorney who can help.

ONE ADDITIONAL IMPORTANT RIGHTS OF AN LLC MEMBER.

Please read on as this is an important point: When a Member is given a membership interest or membership units in an LLC, the rights he/she has is a personal property right.  It is just like acquiring shares in a corporation or title to a car.  The LLC or other Members cannot just take those membership interest/membership units back without the consent of the Member. THIS IS IMPORTANT. 

Before you issue membership units in your LLC to another person, make sure you understand this.  It does not matter how that person acts later, you cannot take those membership units back unless you provide for special provisions or a special arrangement to buy them back via a legal written document.  In summary, additional legal and business planning is required if you want to be able to unilaterally buy back membership units/interests that have been issued to a Member.

This is a very important matter because it comes up often when Members have disputes or another Member ends up not helping out if there was an expectation of him/her helping out in the LLC business.  All obligations need to be in writing.  Please consult with your LLC attorney