LIMITED LIABILITY COMPANY

Organizational structure is one of the most important decisions in forming a business. As most entrepreneurs will tell you, how you choose to structure your company can spell the difference between success and failure. One of the most popular options today is the Limited Liability Company (LLC).

What is an LLC?

A limited liability company is a cross between two other structures: the corporation and the limited partnership. In an LLC, owners enjoy the liability protection of a corporation and the tax advantages offered by a partnership. They are not liable for any of the company’s debts or obligations to third parties. It also offers great flexibility in terms of income distribution, since its ownership and management can be structured in any way. The Operating Agreement, where the structure is outlined, does not need to be publicly filed, allowing privacy and protection for its owners.

The owners of an LLC are called “members.” Unlike a corporation, which can consist of only one person, an LLC requires at least two members. Although many states allow a single person or married couple to form an LLC, the IRS will recognize them as proprietorships.

An LLC has no shareholders; the company has to be organized by two or more of its members and created via a statute. Managers also have to be members, usually appointed in the written Operating Agreement.

What are the advantages of an LLC?

LLC vs limited partnership: An LLC does not have to declare a general partner, and its managers are not required to hold a minimum interest. That means that a manager’s personal assets are completely protected when the company enters a debt, and no single owner can be held fully liable.

LLC vs corporation: In an S-corporation, there can only be up to 35 investors, and each can only get interests in proportion to his share. An LLC, on the other hand, is free to structure income distribution in any way among any number of investors. It also has lower operating costs.

Asset protection: With creditors filing lawsuits left and right, it’s becoming increasingly important to separate one’s personal assets from those of the business. An LLC provides exactly this type of protection to its members.

Tax deductions: Like a corporation, an LLC is a separate entity, but members can treat it as a partnership specifically for its tax flexibility. This way, the LLC itself does not pay any tax because the income is directly passed on to the owners, and each member can structure his taxes however he likes.

Flexibility of management: One major feature of an LLC is freedom to contract, which allows the owners to manage the company any way they like. The law does not require annual board meetings, minutes, resolutions, and amendments, which are required with a corporation.

Unlimited income opportunities: Because there can be any number of investors, an LLC can enter a wide range of income-generating ventures.

Who can benefit from an LLC?

Family-owned businesses: Because of the flexibility of management, tasks and income can easily be distributed among family members. They can also avoid double taxation.

Real estate investors and developers: LLC members can take out loans for real estate on behalf of the LLC, distributing any loss or income from the loan among the members. This allows easy transfer of capital gains between members.

Corporate joint ventures: Since LLCs do not require a general partner to be declared, joint corporations can organize as an LLC to enjoy both pass-through taxation and limited liability.

S-corporation subsidiaries: Sub-S corporations can only own up to 80% of an LLC subsidiary, but they can form – and fully own – a subsidiary LLC. This allows the corporation to expand its resources without the limits of their organizational structure.

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