The limitation of liability provided for the owner (member) is probably the number one reason businesses choose to form a limited liability company. Subject to some limitations, a limited liability company owner is not personally responsible for liabilities incurred by the LLC.
A contract or loan made by the LLC is a simple scenario to use as an example. The LLC has obligated itself to perform the contract or pay back the loan. The LLC functions as an entity separate from its owner. If the LLC defaults on the contract or loan, the LLC must pay any judgment using the assets or income of the LLC. However, if the LLC does not have sufficient assets or income to pay the judgment (or for the judgment creditor to collect from) the owner or owners (members) normally would not be required to use personal assets held outside the LLC to pay the judgment.
In Alabama, the rights and obligations of the limited liability company owners are typically set out in two separate documents. The certificate of formation, formerly referred to as the articles of incorporation, is filed with the probate office and secretary of state to form the LLC. Very little information is required for the certificate of information. Since the certificate of formation becomes public record after filing, it usually includes nothing more than the required information including the name of the LLC, the organizer, the name of the registered agent, the address of the registered and whether the LLC is a series LLC.
A limited liability company or LLC is a business entity created by state law. Limited liability companies are similar to corporations such as the companies traded by stockholders on Wall Street. However, the rules for limited liability companies are much more flexible allowing the complexity of individual LLCs to be easily adapted to fit the needs of each business. For example, a start-up LLC with a single member could be created with complete authority vested in the single owner and minimal reporting requirements. A more complex business with multiple owners could design its LLC with a board of directors, executive officers and non-voting economic interest owners.
Limited liability companies also offer flexibility in taxation. The IRS classifies a single-member LLC as a disregarded entity and treats it as a sole proprietorship for income taxes. An LLC with multiple members is treated as a partnership by default with a share of the income passed through to each individual member for reporting on their personal income tax return. In some circumstances, a limited liability company can also make an election to be taxed as either a C-corporation or an S-corporation.