The limited liability
company (LLC) is a distinct business entity that
combines the corporate advantage of limited
liability protection with "pass-through" taxation,
the method of taxation afforded to both general
partnerships and S corporations.
Like corporations, LLCs come into existence after
making a filing with the appropriate state body,
typically the Secretary of State, and paying the
necessary state filing fees. The LLC formation
documents are typically called articles of
organization or a certificate of organization. In
terms of taxation, the LLC’s income is not taxed at
the entity level as is that of a C corporation.
While the LLC does complete a tax return, the income
or loss of the LLC as shown on this return is passed
through the LLC and is reported on the owners’
individual tax returns. The LLC’s owners then pay
taxes on the LLC’s profits at the individual tax
level. LLCs can elect with the Internal Revenue
Service (IRS) to be taxed like a C corporation, but
this is not overly common.
Other advantages of LLCs include:
- Members are
typically not held personally responsible for the
debts and liabilities of the company.
- Forming an LLC
can help establish credibility for a new business
with potential customers, employees, vendors, and
partners.
- There are
generally no restrictions on the number of members
allowed.
- LLCs have
flexibility in structuring the management of the
company.
- LLCs do not
require as much annual paperwork or have as many
formalities as C corporations and S corporations.
Some disadvantages
of LLCs include:
- LLCs are more
expensive to form than sole proprietorships and
general partnerships.
- LLCs face more
ongoing requirements, such as state annual report
filings, than sole proprietorships and general
partnerships.
- Ownership is
typically harder to transfer than with a
corporation.
- Because the LLC
is a newer business structure, there is not as
much case law to rely on for determining
precedent.
Regarding the
ownership of an LLC, the owners are called members.
Members are analogous to shareholders in a
corporation or partners in a partnership, depending
on how the LLC is structured. Members will more
closely resemble shareholders if the LLC utilizes a
manager or managers because the members will not
directly participate in the management of the LLC.
If the LLC does not utilize managers, then the
members will more closely resemble partners because
they will have a direct say in the decision-making
of the company. An LLC must specify at the time of
formation whether it will be managed by members or
managers.
A member’s ownership of an LLC is represented by
"membership interest," just like a partner’s
interest in a partnership or a shareholder’s shares
of stock in a corporation.
When evaluating whether the LLC is the right
business structure for your particular business, it
is advisable to first determine the goals of your
business, and then to assess the advantages and
potential disadvantages of the different business
structures in relation to those goals. You may also
wish to seek the advice of an attorney or
accountant. |
