Mayank Mathur - Internet project for Dr. Toftoy
A limited liability company is a business structure best described as a hybrid between a partnership and a corporation that gives its owners the best of both worlds -- a "pass through" of all profits and losses to the owners without taxation of the entity itself, as in a partnership, and a shield from personal liability, as in a corporation. The LLC has become the business 'entity of choice' for smaller, privately held companies because it combines the best features of a corporation and a partnership.
An "S" corporation and a limited partnership also offer these advantages. But unlike an "S" corporation, however, a limited liability "company" is actually a non-corporate entity. State laws, which would require a board of directors and officers and would dictate adoption of by-laws, do not apply.
Also, unlike the limited partner in a limited partnership, a member of a limited liability company may participate actively in its management without risking loss of the limitation on personal liability.
A limited liability company is one of the more recent and most flexible business structures available in the 50 states of USA. A limited liability company is a separate legal entity having the power to conduct business, acquire, hold and dispose of property, and sue or be sued in its own name. A limited liability company may have as few as one member.
The limited liability company, then, offers a great deal of flexibility. Primarily owners of small, but relatively riskier, ventures who seek an active management role and limited liability prefer it.
HOW IS A LIMITED LIABILITY COMPANY FORMED?
Although a limited liability company is free from the restrictions of the corporate form, state law governs its formation and general manner of operation.
The entity may be formed by two or more persons (only one person in many states) who must file with the secretary of state of the state in which the enterprise is to be established, its articles of organization and pay a filing fee. Because the powers of the limited liability company are very similar to those of a corporation, the provisions of its articles of organization, which are also prescribed by law, are quite similar to those of the articles of incorporation of a corporation.
The limited liability company comes into existence when the secretary of state issues a "certificate of organization." Unlike a corporation, the limited liability company has no by-laws.
The consensus of its members regarding managerial and related issues are set forth in an operating agreement, which is analogous to the "shareholders agreement" among the owners of a corporation. This is required under the state laws.
Recent IRS regulations concerning limited liability companies, which went into effect in 1997, has made life easier for LLC's formed anywhere in the country. These rules have opened up the LLC way of doing business to one-owner as well as multi-owner businesses, throwing out needless rules that were of interest only to the tax-obsessed.
PRINCIPAL ATTRIBUTES OF A LIMITED LIABILITY COMPANY:
Limited Liability: Like a corporation, the owners of the LLC, called members, are not personally liable for the debts of the LLC. They risk losing only the amount they paid into business to get it started. However, owners are responsible for the business debts that are personally guaranteed and for any wrongs committed personally.
Taxes: Effective January 1, 1997, new regulations have simplified the rules. Now, LLC that has two or more members is classified as a "partnership" for tax purposes and if the company has only one member it is treated as a "sole proprietorship". In either case the company still has limited liability. That is, the LLC is not a separate taxable entity, but rather all items of income and deduction "flow through" to the members, to be reported on their individual returns. This tax treatment is "pure" partnership tax treatment, unlike the treatment given to corporations which have made a Subchapter S election. A LLC is not subject to the risks of double taxation inherent with corporations.
Flexible management: Like partnerships, LLCs enjoy much more flexibility than corporations in structuring the management, which can be by all of the members, by some but not all of the members, or by non-member managers. This flexibility cannot be found in a corporation, where decisions must be split between directors and shareholders. The limited partnership does not allow the limited partners to manage the business without losing their limited liability. Thus in LLC, the managerial structure can, depending on the needs and objectives of the members, vary widely.
Flexible distribution of profits: LLCs, like partnerships, also enjoy much more flexibility than corporations in structuring financial arrangements between or among the members. An LLC, for example, might be an ideal choice for a deal where one member is putting in the money, and the other member is putting in services. LLCs avoid the arcane "one class of stock" rules which are applicable to S corporations. The corporate form is most rigid regarding the rules on how to split profits and partnership the most flexible.
Perpetual existence: LLC is a legal entity, separate and distinct from its owner, and thus has the ability to 'live forever'. The foregoing may be changed by express provision in the LLC agreement.
Owners: Limited Liability Companies offer non-residents many of the same advantages U.S. residents enjoy with the S corporation status. The unit of owners of an LLC or stockholders of a C Corporation may be corporations or foreign citizens. LLCs are also not subject to the arcane restrictions applicable to S corporations respecting the number and nature of shareholders. . Unlike a Subchapter-S corporation, a limited liability company is not limited to 35 shareholders and is not limited by the types of businesses it may transact.
DISADVANTAGES OF A LIMITED LIABILITY COMPANY:
Filing fee usually much higher than corporations. The paperwork and bookkeeping requirements are more than the partnership firms.
Few states do not allow one-person-only limited liability companies. This may change soon in response to IRS regulation that permits single member LLC.
As per the IRS regulations, an S Corporation shareholder may pay less self-employment tax than an LLC member with similar income. One will need to decide, if this potential tax saving is enough to offset LLC advantages as flexibility in management structure and in the method of distributing profits and losses.
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