Company Formation
Limited Liability Company

A limited liability company (denoted by L.L.C. or LLC) is a legal form of business company in the United States offering limited liability to its owners. In that respect, it is similar to a corporation, and is often a more flexible form of ownership, especially suitable for smaller companies with a limited number of owners. Unlike a regular corporation, however, a limited liability company with one member may be treated as a disregarded entity and a limited liability company with multiple members is typically treated as a partnership for tax purposes, thereby avoiding double taxation. It is often incorrectly called a "limited liability corporation" (instead of company).

Note that the label "disregarded entity" means that for income tax purposes the entity is ignored. The entity's income and deductions are reported on its owner's tax return. For example, an LLC operating an active trade or business and owned by a single member would have its income and deductions reported on the owner's individual tax return on a Schedule C tax form. An LLC passively investing in real estate and owned by a single member would have its income and deductions reported on the owner's individual tax return on a Schedule E tax form. And an LLC owned by a corportion--in other words, an LLC with a single corporate member--would be treated as an uncorporated branch and have its income and deductions reported on the corporate tax return.

LLCs were first enacted by the state of Wyoming but can now be created under the laws of any U.S. state.

Top

Advantages

· No requirement of an annual general meeting for shareholders.

· No loss of power to a board of directors.

· 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.

· Much less administrative paperwork and record keeping.

· Pass-through taxation (i.e., no double taxation), unless the LLC elects to be taxed as a corporation using IRS Form 8832.

· 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 are 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.

· 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 distributions 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

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. Thefranchise 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, or simply a flat fee, as in Delaware. Effective in Texas for 2007 the franchise tax is replaced with the Texas Business Margin Tax. This is paid as; tax payable = revenues minus some expenses with an apportionment factor.

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 eventualIPO.

· The possible lack of any operating agreement requirement can cause problems

· Some people, such as new business people, may not be familiar with the governance of LLCs. Unlike corporations, they are not required to have a board of directors or officers.

The principals of LLCs use many different titles -- e.g., member, manager, managing member, chief executive officer, president, partner -- some of which are not correct. As such, it can be difficult to determine who actually has the authority to enter into a contract on the LLC's behalf.

In many countries, including the United States and United Kingdom, corporate profits are taxed at a corporate tax rate, and dividends paid to shareholders are taxed at a separate rate. Such a system is sometimes referred to as "double taxation," because any profits distributed to shareholders will eventually be taxed twice. One solution to this (as in the case of Australia and UK tax systems) is for the recipient of the dividend to be entitled to a tax credit which addresses the fact that the profits represented by the dividend have already been taxed. The company profit being passed on is therefore effectively only taxed at the rate of tax paid by the eventual recipient of the dividend

Top 

The information and opinions expressed on this web site are not intended to be a comprehensive study, nor provide legal advice, and should not be treated as a substitute for specific advice concerning individual situations.  Arch1design is not responsible for the content of external internet sites which link to this site or which are linked from it.