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| Limited Liability Company |
A limited liability company ("LLC") is as a legal entity that is a hybrid between a partnership and a corporation. The owners (called "members") have many of the same tax benefits as a partnership, while at the same time being able to take advantage of the limited liability characteristics of a corporation ).
Unless the members elect to be taxed as a corporation, the tax treatment of a properly organized LLC is very similar to that of a partnership or sole proprietorship. Profits and losses are passed through to the members of the LLC and there is no income tax at the business level.
Like a corporation, the members of an LLC are generally shielded from personal liability for the debts and obligations of the company.
You form an LLC by filing a "certificate of formation" or similar certificate with the Secretary of State. Members of LLCs typically enter into an "operating agreement" that establishes how the LLC is run.
Many of the provisions of an LLC operating agreement are similar to those contained in a typical partnership agreement. For example, the operating agreement usually contains a "buy-sell" agreement governing how and to whom you can transfer membership interests in the LLC.
Generally, LLCs may have an unlimited number of owners and there are no restrictions on the type of persons who may be owners. Some states require that an LLC have at least two owners.
One advantage of an LLC over a corporation is that there is more flexibility in management. For example, an LLC may be managed in the following ways:
- Solely by its members
- By its members and a management committee serving in a function similar to the board of directors of a corporation or
- By its members, a management committee, and officers
It may be possible to achieve many of the same benefits of an LLC through use of an S corporation. However, an LLC may afford the additional benefit of being able to provide for allocations of profits, losses and distributions disproportionate to the percentage of equity interest held in the LLC. And the shareholders of an S corporation must usually be individuals and cannot exceed 75 in number. LLCs may not be subject to the same limitations.
An LLC may have more than one class of equity interest, as well as wholly owned subsidiaries whose assets, liabilities, and operating results will be treated independently from those of its LLC parent. In contrast, an S corporation can have only one class of stock.
You can use the LLC form of conducting business without worrying about raising capital in offerings of the company's securities, because of the protection against liability given to equity holders and the ability to freely transfer equity interests.
Because an LLC combines the protection from personal liability of a corporation with the tax advantages and managerial flexibility of a partnership, it is oftentimes the entity of choice for many new businesses.
From a practical standpoint, though, there is the potential drawback that LLCs have not been around as long as corporations and so people who you will have to work with may not be as familiar with them (for example, bankers, insurance agents, CPA's and, yes, even lawyers).
Many states now permit professionals to operate their practices through LLCs or limited liability entities, which are sometimes called "limited liability partnerships." |
