Top 10 LLC Misconceptions

By John Williams | Published September 23, 2011

1. LLC’s have stock. No. LLC members’ ownership derives from the agreement with the company and its other members, not from the possession of a certificate. While an LLC can issue membership certificates, it is not recommended and such membership certificates are misleading. The ownership interest is derived from the contract, not possession of a certificate.
2. LLC’s means limited liability corporation. No. It is Limited Liability Company.
3. LLC’s are the same no matter where they are formed. No. The law of incorporation governs the LLC and its internal affairs. Each state law is different. Chances are your home state’s laws are not as flexible or protective as Delaware.
4. LLC’s are just corporations without the formalities. No. LLC’s are contractual entities governed by an operating agreement, whereas a corporation is largely statutory, meaning the roles of the stockholders, directors and officers are in large part controlled by default laws.
5. LLC’s are better for holding assets than running businesses. No. The LLC is great for holding assets, but it is also very well situated for active businesses.
6. LLC’s cannot be taxed like an S-corp. No. The LLC is taxed as a partnership or sole-proprietorship by default, but it can make an “S-election” on a form 2553, just like a corporation.
7. LLC’s can be tax exempt. No. Although a restricted owner LLC can be a subsidiary of a public charity or private foundation, it cannot itself apply for tax exempt 501(c)(3) status on the form 1023 with the IRS.
8. A single-member LLC does not provide any protection. No. The single LLC does not have other interested parties that may help the member prevent the creditor from attempting to attach that member’s LLC interest. However, the single member LLC in Delaware is still entitled to the charging order as the exclusive remedy of creditors. It is also exceedingly difficult to pierce the corporate veil of even a single-member LLC.
9. If I put my personal property into an LLC, it will protect those assets from creditors. No. If an LLC just holds assets without a business purpose, it provides those assets very little protection from personal creditors. Future creditors, who are not reasonably foreseeable, are better fought off with a Delaware asset protection trust or by investing in qualified retirement assets.
10. The LLC has to be run by Managers or Directors. No. The LLC can also be set-up to be run by its members or officers. The LLC agreement determined the titles of the agents who run the company and their scope of authority. For this reason it is important to read your LLC agreement over carefully before signing it and make changes so that it operates exactly how you want it to.

When deciding where to form your company, consider that Delaware has advantages over your home state that may benefit you. Go