Limited liability company
From Wikicpa
A limited liability company (denoted by L.L.C. or LLC in the US) is a legal form of business company offering limited liability to its owners. It is similar to a corporation, and is often a more flexible form of ownership, especially suitable for smaller companies with restricted numbers of owners.
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History
The limited liability company form was introduced relatively recently to the United States, with a statute having been first considered (but not adopted) in Alaska in 1975 and the first statute adopted in Wyoming in 1978. An LLC provides limited personal liability to owners of its equity interest, similar to a corporation and certain limited liability partnerships, and in contrast to the personal liability for the debts and obligations of the business that are borne in the general partnership, joint venture or sole proprietorship. A variant of the LLC available in some jurisdictions, typically limited to licensed professionals such as lawyers, certified public accountants, physicians, or engineers, is the professional limited liability company (denoted by "P.L.L.C." or "PLLC"). In most cases the PLLC is identical to a non-professional LLC except that there are additional rules related to professional regulation; the scope of those rules varies state to state. Although some people refer to an LLC as a "limited liability corporation", the correct terminology is "limited liability company". All states permit an LLC to be organized with a single member.
Basically, an LLC allows for the flexibility of a sole proprietorship or partnership structure within the framework of limited liability, such as that granted to corporations. A perceived advantage of an LLC over a corporation or limited partnership is that the formalities required for creating and registering LLCs are much simpler than the requirements most states place on forming and operating corporations or limited partnerships. Two examples of simplified requirements are: the lack of requirement for annual meetings of shareholders (LLCs have "members") and no requirement for written bylaws (LLCs have an operating agreement or regulations, but there is no requirement that they be in writing). As contrasted with a limited partnership, which require that the general partners be named in the certificate of limited partnership, LLC acts do not require that the articles of organization list the members or the managers. Most LLCs will, however, choose to adopt an Operating Agreement or Limited Liability Company Agreement to provide for the governance of the Company, and such Agreement is generally more complex than a corporation's bylaws. Note, too, that some states, such as New York, require an operating agreement.
For purposes of U.S. tax law, a curious feature of the LLC is that an LLC can elect how it should be treated for federal and often for state income tax purposes. An LLC with one owner, for example, is treated as a sole proprietorship by default (when an LLC has a single owner - either an individual or an entity - it is a disregarded entity for federal tax purposes), but this one owner LLC can also elect to be treated as a C Corporation or as an S corporation. Further, an LLC with more than one owner is treated as a partnership by default, but a multiple owner LLC can also elect to be treated as a C corporation or as an S corporation. To elect C corporation treatment, an LLC files a Form 8832 ([1]) with the IRS. To elect S corporation treatment, an LLC files a form 2553 ([2]) with the IRS.
One reason that a business might choose to be organized as an LLC is to avoid "double taxation". A traditional corporation is taxed on its income, and then when the profits are distributed to the owners of the corporation (i.e., the shareholders), those dividends are also taxed. With an LLC, income of the LLC is not taxed, but each owner of the LLC (i.e., each member) is taxed based on its pro rata allocable portion of the LLC's taxable income, regardless of whether any distributions to the members are made. This single level of taxation can lead to significant savings over the corporate form. Similarly, under some circumstances, members of an LLC may deduct losses of the LLC on their personal tax returns.
Another reason that a business might choose to be organized as an LLC is to exploit the tax classification flexibility that LLCs allow. A new business experiencing losses might choose to operate as a sole proprietorship or partnership in order to pass through those losses to the owners. A slightly more established business might operate as an S corporation to save on self-employment taxes. A large mature business with many owners might operate as a C corporation.
LLC v. LLP
A limited liability company (LLC) differs from a limited liability partnership (LLP) in that the LLP is a partnership. LLP is a status elected by a partnership, a status that alters the rule of liability anong that partners. The states have different rules on how the rule of partner liability is altered, so the state law in question must be examined.
Advantages and Disadvantages of an LLC (Limited Liability Company).
Advantages of an LLC
- No requirement of an annual general meeting for shareholders (in some states, such as Tennessee and Minnessota, this statement is not correct).
- No loss of power to a board of directors (although an operating agreement may provide for centralization of management power in a board or similar body).
- Corporations are enduring legal business entities, with lives that extend beyond the illness or even death of their owners, thus avoiding problematic business termination or sole proprietor death. Planning for the death of an owner of an LLC is rather more difficult.
- Corporations can raise capital through stock sales.
- Much less administrative paperwork and recordkeeping.
- Pass-through taxation (i.e., no double taxation).
- Limited liability (meaning that the owners of the LLC, called "members," are protected from liability for acts and debts of the LLC).
- Using default tax classification, profits taxed personally (at the member level, not at the LLC level).
- Check-the-box taxation. An LLC can elect to be taxed as a sole proprietor, partnership, S-corp or corporation, providing much flexibility.
- Can be set up with just one natural person involved (but then, single shareholder corporations are allowed in every state).
- Membership interests of LLCs can be assigned, and the economic benefits of those interests can be separated and assigned, providing the assignee with the economic benefits of distributons of profits/losses (like a partnership), without transferring the title to the membership interest (i.e., See VA and Delaware LLC Acts).
- LLCs in some states are treated as entities separate from their Members (See VA LLC Act), whereas in other jurisdictions case law has developed deciding LLCs are not considered to have separate juridical standing from their members (See recent D.C. decisions).
Disadvantages of an LLC
- Many states, including Alabama, California, Kentucky, New Jersey, New York, Pennsylvania, Tennessee, and Texas, levy a franchise tax or capital values tax on LLCs. In essence, this franchise or business privilege tax is the "fee" the LLC pays the state for the benefit of limited liability. The franchise tax can be an amount based on revenue, an amount based on profits, or an amount based on the number of owners or the amount of capital employed in the state, or some combination of those factors.
- It may be more difficult to raise capital for an LLC, as investors may be more comfortable investing funds in the better-understood corporate form with a view toward an eventual initial public offering.
- The possible lack of any operating agreement requirement can cause problems
- Some people, such as new businessmen or low-level clerks, may not be familiar with the LLC structure and may demand actions by Directors or by Shareholders or officers. While an LLC may establish something akin to a board of directors and can designate officers, it is not required to do so. Thus, a low level clerk's insistence on a signature of a President may require an LLC to appoint a President in order to get around the red tape.
Estate planning advantages
- Asset Protection: LLC's limit liability exposure by offering creditor and predator protection and partnership interests can be protected from divorce claims
- Efficient Wealth Transfer: LLC's provide a convenient method to transfer wealth between generations.
- Financial Tutelage: Direct wealth transfers to beneficiaries could hinder personal development. By implementing a family business structure, a benefactor could promote incentives and values to beneficiaries.
