What is a limited liability company?
Limited Liability Companies or LLC are not a corporation. It is a distinct type of business sometimes referred to as a hybrid company because it combines the corporate advantages of limited liability with the partnership advantage of pass-through taxation.
Do I need an attorney to form an LLC?
No, an attorney is not a legal requirement. You can prepare and file the articles of organization yourself; however, you should understand the requirements or Let Lanick save you time and money by setting it u for you.
How many people are needed to form an LLC?
The IRS does allow one member LLCs to qualify for pass-through tax treatment.
How is an LLC taxed?
An LLC can be taxed for federal income tax purposes as a partnership, disregarded entity, Corporation or and S-Corporation. An LLC can elect partnership status to avoid taxation at the entity level as an “association taxed as a corporation.” If an LLC is not taxed as a partnership, it will be taxed at the entity level similar to a standard or C corporation.
What is the organizational structure of an LLC?
An LLC is owned by its managers and members. Members are similar to partners in a partnership or shareholders in a corporation, depending on how the LLC is managed. A member will more closely resemble shareholders if the LLC utilizes a manager or managers, because then the members will not participate in management. If the LLC does not utilize managers, then the members will closely resemble partners because they will have a direct say in the decision making of the company. Managers most closely resemble officers in a corporation.
A manager or member’s ownership of an LLC represents their interests, just as partners have interest in a partnership and shareholders have stock in a corporation.
How is an LLC managed?
An LLC may be managed by its members (owners) or by selected managers (similar to officers).
If the LLC is to be managed by its members, it operates much like a partnership. Each member has an equal say in the decision making process of the company.
If a manager or managers are elected they act in a capacity similar to a corporation’s board of directors. These managers are in charge of the affairs of the company.
Member management is the normal default rule of state law. This means that if managers are not selected in the articles of organization, the members will direct the affairs of the LLC.
What are the advantages of an LLC?
- LLCs allow for pass-through taxation
- Members on an LLC are not typically held personally responsible for the debts and liabilities of the business
- LLCs generally have no ownership restrictions
- LLC members have flexibility in structuring the management of the company
- An LLC does not require as much annual paperwork, or have as many formalities, as a C corporation or an S corporation
- Written consent of LLC members must be obtained prior to increasing ownership in the company
- Potential customers may perceive an LLC as a more professional entity than a sole proprietorship or partnership
What are the disadvantages of an LLC?
- At least two members are required in many states
- A Schedule C as a sole proprietor is filed unless it elects to file as a corporation
- Earnings are generally subject to self-employment tax
- Many states limit the life of the LLC
- If 50% or more of the capital and profit interests are sold or exchanged within a 12-month period, the company will terminate
- The company may lose its ability to use the cash method of accounting if more than 35% of losses can be allocated to non-managers
- LLC’s cannot take advantage of incentive stock options, engage in tax-free reorganizations, or issue Section 1244 stock.
- Lack of uniformity
- Businesses that operate in more than one state may not receive consistent treatment.
- Some states do not tax partnerships; but they do tax LLC’s
- Minority discounts for estate planning purposes may be lower in an LLC than a corporation.
- Because LLCs are easier to dissolve, there is greater access to the business assets.
- LLC discounts may only be 15% compared to 25% to 40% for a closely-held corporation.
- Conversion of an existing business to LLC status could result in tax recognition on appreciated assets.
Other disadvantages:
- More Paperwork than an ordinary partnership documents must be filed at the state level to create an LLC, which is not the case with a general partnership.
- Newer Entity Type LLC’s are a newer entity. People are not as familiar with the LLC as an entity and the laws pertaining to LLC’s are not as clearly defined as corporate law, which subjects the LLC to grey area and interpretation during litigation in certain situations.