Limited Liability Company (LLC)

Limited Liability Company (LLC)
A Limited Liability Company (LLC) is a relatively new business structure allowed by state
statute. LLCs are popular because, similar to a corporation, owners have limited personal
liability for the debts and actions of the LLC. Other features of LLCs are more like a
partnership, providing management flexibility and the benefit of pass-through taxation.
Owners of an LLC are called members. Since most states do not restrict ownership, members
may include individuals, corporations, other LLCs and foreign entities. There is no maximum
number of members. Most states also permit “single member” LLCs, those having only one
owner.
A few types of businesses generally cannot be LLCs, such as banks, insurance companies and
nonprofit organizations. Check your state’s requirements and the federal tax regulations for
further information. There are special rules for foreign LLCs.
To set up an LLC, you follow a path similar to the formation of a corporation. You must
submit an article of organization and the appropriate filing fees to the secretary of state in the
state where your business is organized. Because states differ in the information required, it is
wise to consult your attorney or accountant if you think the limited liability company form of
legal structure is right for your business.
Benefits
• LLCs offer greater flexibility than S corporations. You can
accomplish the goals of limited liability and pass-through taxation. It offers
its owners greater flexibility in allocating profits and losses and is not
subject to the many restrictions of an S corporation.
• Loss deductions are more liberal for LLCs. The owners of an LLC
do not assume liability for the business’s debt, and any losses can be used
as tax deductions against active income. Loss deductions are more limited
under an S corporation.
• There is less restriction on participation. An LLC can be formed
with just one person in every state except Massachusetts, which requires at
least two owners. There is not maximum number of owners allowed.
• LLCs can offer more stock options. Unlike an S corporation, and
LLC can offer several different classes of stock with different rights.
Risks
• Different rules apply in different states. An LLC is a state entity
and the business is governed by the code of that state. In some states, the
business is dissolved on the death, retirement, resignation, or expulsion of
an owner. Be sure to check your state’s code to see if an LLC is the best
form of legal structure for your business.
• It may be difficult to operate in other states. Expansion of the
business out of state may be inhibited. If a company doing business as and
LLC wished to do business in another state without similar legislation,
there is no provision for it to legally register to conduct business in that
state.
• Converting an existing business may have tax implications.
Special rules may apply when your LLC has an operating loss. The amount
of loss you can deduct may be limited because of your limited liability for
LLC debts. Passive Activity Loss limitation may restrict the amount of loss
you can deduct. Also, if you convert an existing business, such as a
corporation, into an LLC, the conversion may result in a taxable gain.
Employment tax wage bases may also be affected.