What is an LLC and How Does an LLC Work?

Featured recently in The National Law Review an article by Christopher J. Caldwell and Laura E. Radle of Varnum LLP regarding LLCs:

Varnum LLP

Many cottage owners have heard of others who have established a “Cottage LLC”. But what exactly does this mean? What is an LLC? How does an LLC which owns a cottage work and why would someone use an LLC to own his or her cottage?

Simply put, an LLC is a “limited liability company,” which has some features of both partnerships and traditional corporations. It provides greater liability protection than individual ownership and may have perpetual existence. However, an LLC is also somewhat simpler to manage than a traditional corporation.

In an LLC the owners are called members. The LLC can be controlled either by its members or by managers who are selected by the members. In family cottage situations, selecting one or two managers (who may be members) typically works best.

The rules and regulations of an LLC are set forth in the LLC’s operating agreement. The operating agreement can be as basic or as detailed as the members wish. At a minimum, when created for cottage ownership, the operating agreement should discuss the potential sale or transfer of the cottage, management responsibilities, contributions for expenses, potential for renting, scheduling of time, liability of the owners, and an exit strategy if one owner wants to end the relationship. The primary goal of the LLC – as addressed by the operating agreement – is to provide clear rules, rights and obligations for all of the members.

Cottage owners often need to use an entity that will provide a liability shelter (for example, if the cottage is rented to third parties). But the owners also need an entity that does not require a lot of time to maintain. And, most importantly, because cottage owners want to be able to tailor the operating agreement to fit their lifestyles, they need an entity that is flexible. The LLC has all of these attributes, making it a great match for cottage owners. And once an LLC is established, cottage owners will be able to focus on the fun part of their ownership, spending carefree and conflict-free time at the cottage.

© 2012 Varnum LLP

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