The Limited Liability Company
is Best
Limited Liability Companies
combine the best legal and tax characteristics of corporations and
partnerships (as well as sole proprietorships for Single Member LLCs)
while avoiding many tax disadvantages.
The LLC can offer limited
liability protection to
its owners (members) while being treated as a partnership or sole
proprietor for Federal Income Tax purposes. The LLC taxed as a
partnership will file a 1065, and the Single Member LLC would simply
file a Schedule C with the 1040, the same as a sole proprietor.
Limited Liability Partnerships,
LLP, are very similar to the Limited Liability Company, but are
typically restricted to licensed professionals. There is no such thing
as a Limited Liability Corporation.
This is simply a misnomer for the LLC.
What Makes a LLC so Powerful?
A Limited Liability Company
has similar protections for the owners as a corporation. Limited
Liability Companies have the advantage of a partnership when it comes
to its organization and control. It can have multi-levels of membership
interest, and control and equity benefits limited by the parties (and
their attorney's) imagination. The LLC has the extreme flexibility of a
partnership, yet can be set-up in a traditional manner similar to a
corporation.
Limited
Liability Companies have
the following main advantages:
- Limited Liability.
This limited liability is similar to a corporation but is not perfect
protection as many clients want to believe.
- Pass-Through Entity. Limited Liability Companies
are generally pass-through entities for tax purposes. That means that a
Single Member Limited Liability Company is treated as a Schedule C sole
proprietorship for tax purposes. A multi-member Limited Liability
Company is treated as a Partnership for tax purposes. (It should be
noted that a Limited Liability Company can elect to have tax treatment
as a corporation if it so chooses.)
- Permanency.
A Limited Liability Company may have the
permanency of a corporation's perpetual existence. This means that it
does not terminate on the death or disability of the member
(contrasting with the sole proprietorship which would terminate on the
death or disability of the proprietor.) Note that for tax purposes,
this would be considered a "technical termination."
- Transferability.
The Limited Liability Company, as an
entity, can admit new members and modify the membership and investment
structure. This is an exceptionally useful feature for closely-held
businesses when transferring the business between family members of
different generations.
- Employment
Taxes. The Limited Liability Company is liable
for employment taxes, both the trust fund portion and the employer
portion. If the LLC terminates business owing employment taxes, the
members and officers would only be responsible for the trust fund
portion and not the employer's portion.
- Cost.
The cost of establishing a Limited Liability
Company
is similar to setting-up a corporation with a Buy/Sell Agreement or a
partnership. The accounting and legal costs are very similar.
Setting-Up a LLC
Establishing a Limited
Liability Company, is very similar to forming a corporation. First, a
business lawyer begins the LLC formation by filing Articles (or
Certificate) of Formation with the Secretary of State of the appropriate
State.(Note, you are forming a llc, you do not incorporate a llc.)The
Articles of formation outline the name, purpose and initial officers of
the LLC and give public notice of the filing. Next, the llc operating
agreement outlines how the business sill actually function.More
LLC Taxation
The LLC may elect
pass-through tax treatment. Limited Liability Company partnership tax
treat requires filing a US 1065, which is the same as a general
partnership. Single Member LLCs may be treated as a "disregarded
entity." The owner would file a 1040 Schedule C, which is the same for
an unincorporated sole proprietorship.
