Limited Liability CompanyA Limited Liability Company is a formal organizational business structure that establishes a separate legal entity from its members. Several states permit single-member LLCs, while others require at least two or more members. If an LLC only has one member, it is typically taxed as a corporation or disregarded entity (meaning that for tax purposes only it is as if the LLC does not exist) whereas an LLC with more than one member is typically taxed as a partnership, but not always.LLCs are organized by Articles of Organization and often have an Operating Agreement in which the members of an LLC define the operation, management, membership, and income distribution of the company. Since an LLC is recognized as a separate legal entity, liability protection is provided for both the LLC members and the LLC itself. LLCs also have much flexibility when it comes to taxation options.
Advantages of a Limited Liability Company:
An LLC is a separate legal entity
Unlimited number of LLC members allowed
LLCs may own property and sue/be sued Limited Liability Protection for all members
Flexible organizational rules
No Board of Directors or Officers required
Tax benefits
Corporations are allowed as LLC members
The primary advantage for an LLC is that it establishes a separate legal entity from that of the unlimited number of members. As a result, an LLC may own property and sue/be sued in a legal arena. However, one of the key benefits of separate legal status is the limited liability protection it provides. First, members of the LLC are protected from claims against the LLC. The legal provisions of an LLC provide a certain degree of protection for the personal assets of the members against seizure resulting from litigation against the LLC.
For example, if an LLC is sued and a judgment is awarded, the personal assets (including checking/savings accounts, automobiles, and even homes) of the members are protected. Likewise, the status of separate legal entity of an LLC protects the assets of the LLC from claims against one of the members.For example, if one of the members in an LLC is sued and a judgment is awarded, the collective assets of the LLC are protected. Also, if a member owes a debt, the creditor cannot attack the LLC assets. Furthermore, since corporations are allowed to be a member of an LLC, this further level of tiered ownership increases the degree of liability protection afforded the owners.Business owners or investors should seek competent counsel regarding legal matters associated with an LLC. Unlike a corporation, there is no requirement for a Board of Directors or Officers, which allows for a more simple, yet dynamic, responsive operating structure.
The responsibilities of the members of the LLC may be completely dictated by an operating agreement, depending on the structure of the LLC. This allows the entity to operate without a special need for annual meetings, special notations, or compliance record keeping.In addition, LLCs and LLC members alike enjoy many tax benefits. The LLC itself is eligible for check-the-box taxation declaration whereby an LLC can elect to be taxed as a sole proprietor, partnership, S corporation, or C corporation. LLC members also benefit from pass-through taxation in most of those entities, whereby income is claimed only at the individual level, with no double business income tax. Even if there is no actual distribution, the profits and losses of an LLC are reported directly on the members’ individual tax returns (IRS Form 1040). After filing a U.S. Return of Partnership Income (IRS Form 1065), or S Corporation (IRS Form 1120S), the LLC declares each member’s taxable income or deductions and related tax items on a Partner’s or S Corporation Member’s Share of Income, Deductions, Credits, Etc. (IRS Schedule K-1).
Some states don’t recognize an LLC as an approved entity for certain types of service professionals, such as doctors, accountants, engineers, etc.In brief, the LLC structure can work well for a variety of business types or investments to provide protection, but clearly is not for all types.One of the keys to the best use of an LLC is how it is set up for tax purposes, as that could and definitely should differ depending on the type of business or investment, the ownership, the expected net income to be gained, and the tax situation of the owners and the owners’ other taxable entities.Business owners should seek advice from an informed and competent tax advisor regarding these matters.