LLC Frequently Asked Questions
What does ‘limited personal liability” mean?
“Limited Liability” essentially means that if someone sues you and wins, they can only reach those assets owned by the entity and they cannot force you to liquidate or transfer any personal assets, such as your personal residence, vacation home, etc. Limited liability entities were initially formed in the 1600’s in Europe as a means to encourage economic and colonial growth. The original such entity, the corporation, allowed entrepreneurs to limit investor liability to the amount of money the investor contributed. In fact, America was settled by an early corporation, Massachusetts Bay Company, which was chartered by King Charles I in 1628.
What is a “limited liability company” or “LLC”?
Originating in Germany as the “private limited company”, this entity type came to the United States in 1977 when Wyoming passed the first LLC act. In a nutshell, a ‘limited liability company” or “LLC” is an entity that provides its owners with the limited personal liability protection of a corporation but with the flexibility of general partnership. With a corporation there are all sorts of formalities that must be observed or you risk losing the protection (Shareholder Meetings, Board of Director Meetings, Executives elected, etc.). Partnerships and LLC’s are generally not required to observe nearly as many such formalities, giving the owners much more freedom to run the company as they see fit.
How does an LLC differ from a “Limited Family Partnership”?
“Limited Family Partnerships” were popular before LLC’s were were created. In Arizona, they enjoy virtually identical protection under the law. But the difference is that in a general partnership, all the partners are personally liable. In a limited partnership, any partner that is not actively involved in the business can become a ‘limited partner’, meaning that their personal liability is limited. However, there must be at least one general partner and the general partner is always personally liable. To be used effectively, the general partner would have to be a limited liability entity itself, usually a corporation. Since these days you can usually use an LLC much more easily, you typically don’t see many Limited Family Partnerships. (The ‘family’ part is just added to designate that it is for estate planning purposes).
What is a “Statutory Agent”?
Arizona statute requires that an Arizona entity must have and maintain a Statutory Agent. The Statutory Agent must be located in Arizona and have a valid street address (not a PO Box). By having a Statutory Agent you give notice to the public that there is a person or entity authorized to receive legal service or documents on behalf of the company. The statutory agent is the only person or entity that can be served with a summons and complaint filed in a lawsuit against the Company. A Statutory Agent is often referred to as a “Registered Agent” in other states.
What is a “Registered Office”?
The Registered Office is also called the “Known Place of Business”. Arizona statute requires that it be located within the state, but allows it to be ‘in care of’ the Statutory Agent.
What are "Self-Employment Taxes"?
Self Employment Taxes are the 15.3% that you have to pay on the money you earn. The 15.3% is made up of 12.4% for Social Security and 2.9% for Medicare. For 2006 you are taxed on the first $94,200 that you earn. After that you stop paying the Social Security and only have to pay the 2.9% for Medicare on anything you make. When you elect to be taxed as an S-Corporation you can pay yourself a 'reasonable salary' on which you pay Self Employment Taxes and take the rest as a 'dividend', upon which you pay no Self Employment Taxes. See LLC's vs. S-Corps on the Business Law page for more info.
