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  4.  » What is a limited liability company?

Residents of Baton Rouge who are interested in starting a business must chose a legal form for that business. In doing so, they are immediately confronted with a confusing array of business law abbreviations, including, “corp.,” “inc.” and “llc.” They may also come across terms such as partnership and limited partnership. What does it all mean?

Each word or abbreviation refers to a particular type of legal entity that can be used for organizing and operating a business. “Corp.” refers to a business corporation, the most complex form of business organization. “Inc.” also refers to a business corporation. Limited partnerships are a form of partnership in which some partners do not have general liability for the partnership; these entities are most commonly used for real estate developments. Each form of organization has different advantages and disadvantages, depending on the nature of the business that is being organized.

A limited liability company is a form of organization that was conceived in the last two decades to allow businesses to combine two important features of corporations and partnerships: the limited liability of investors in a corporation and the less rigid organizational structure of a partnership. An LLC is formed by filing articles of organization with the secretary of state, but the critical document is the operating agreement. This agreement resembles a partnership agreement. It is a contract between the investors in the LLC that spells out how the firm will be managed, who has the right to participate in management decisions, whether and how new members will be admitted to the LLC and many other questions essential to managing the entity. Once the articles of organization are filed and the operating agreement is signed, the members’ liability for the debts of the LLC are limited to the amount they have invested or put at risk.

Forming an LLC can be relatively simple, but many LLCs require a multi-tiered management structure and formal provisions for buying and selling assets, most importantly, real estate. Anyone considering using the LLC form to organize a new business may want to get more legal information about drafting the operating agreement, meeting requirements and membership qualification.