A Visual of an LLC
The business and a bad call
John, Lisa and Ralph are standing in a room together and in this room with them is a machine that makes powerful tools. John, Lisa and Ralph come to an agreement to sell the tools made; the agreement is typed on a document and sign by all of them. Also on this document are details on how profits will be split, who is responsible for what job and the rules and regulation everyone in the room must follow. Months go by, things are running smoothly and while making the tools, Ralph decides to skim on materials and take a few short cuts without notifying John and Lisa. It seems like no big deal until a letter comes in the mail a week later from a lawyer; a customer has been injured while using their tool. After investigating into the issue it’s determined the issue was an immediate result of Ralph's decision to skim on materials.
The Legal Outcome
John and Lisa are furious and the company is facing a lawsuit without a doubt. After a court verdict not in their favor John goes home to break the bad news to his wife. While telling his wife her first and immediate response is, “Are we going to lose our house and everything we have worked hard for”? Without hesitation John replies, "Absolutely not, the group is an LLC (Limited Liability Company)". As defined by investopedia, "A limited liability company (LLC) is a corporate structure whereby the members of the company cannot be held personally liable for the company's debts or liabilities. Limited liability companies are essentially hybrid entities that combine the characteristics of a corporation and a partnership or sole proprietorship." Because the company was originally formed as a Limited Liability Company neither John, Lisa and even Ralph are held personally responsible for the debt the group now carries.
Changing Members
Monday has come and a meeting has taken place in which John, Lisa and Ralph discuss how they will resolve the issue and pay the debts. John makes the suggestion to have Ralph removed from the group due to his violation in the original rules and regulations. Lisa and Ralph both agree to this and Ralph will formally step down from his position. As a result Ralph is no longer entitled to any profits from the continued production of the tool. Also, Ralph is still is not and will never be personally and financially responsible for the debt the group is carrying due to the law suit. John and Lisa soon come to realize they can’t make a portion of the tool and decide to replace Ralph’s former position with someone else skilled enough to make the tool. John and Lisa soon meet Frank and decide he’s the guy they need. John, Lisa and Frank continue the day to day operations and eventually the group generated enough money to settle their debts as well as turn increased profits for that quarter. To speed up the process of settle the debt John and Lisa volunteered a portion of their profits to insurance and settling the debt. Frank choose not to as he was not personally or financially obligated. There are many advantages of an LLC and disadvantages as well. It’s always best to consult a legal professional when making the decision to form the structure of an organization.
