What is a Limited Liability Company (LLC)?
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What is a Limited Liability Company (LLC)?
2009.04.09
A limited liability company is a legal form of business company that provides limited liability to its owners. It is a hybrid business entity which provides certain characteristics of both a corporation and a partnership. The primary characteristic an LLC shares with a corporation is "limited liability" and the primary characteristic it shares with a partnership is the availability of pass-through income taxation. It is often more flexible than a corporation and it is well-suited for companies with a single owner.
Here are some benefits of a Limited Liability Company:
- Liability Protection
Like a corporation, the owners of a limited liability company do not face personal liability for business debts or for legal claims made against the company. However, it is important to note that in an LLC, as with a corporation, you may become personally liable for certain debts of the company if you sign a personal guarantee. Signing an agreement with just your name, and not adding "Manager, of ABC, LLC" you can become personally liable. So it is very important to carefully read over any contractual agreements you come in contact with. Identifying any lines stating "personal guarantor". As long as you follow the guidelines, your LLC will keep you protected.
- Unlimited Ownership
People often have trouble utilizing the S corporation because it sets limits on the number of owners it can have. An S corporation is only allotted seventy-five or fewer share holders. Also, some foreign citizens and certain entities prohibited from becoming shareholders of an S corporation. On the other hand, an LLC offers extreme flexibility of allowing for one to an unlimited number of members. Each of whom may be a foreign citizen, spendthrift trust, or corporate entity. Unlike an S corporation, in the event a shareholder sells their shares to a prohibited shareholder, you won't have to worry about losing your flow-through taxation.
- Flexible Management
LLC offers two flexible means of management. First, they can be managed by all of their members, which is known as member-managed. Second, they can be managed by just one or some of their members or by an outside nonmember, which is called manager-managed. If the members of an LLC want to change from manager-managed to member-managed, or vice versa, it can be accomplished by a simple vote of members.
- Distribution of Profits and Losses/Special Allocations:
A remarkable feature of an LLC is that partnership rules provide that members may divide the profits and losses in a flexible manner. By including special language in the operating agreement for your LLC, you may be able to create a safe haven to insure that future special allocations will have a substantial economic effect.
- Flow-Through Taxation:
Another great benefit of an LLC, and a key reason for its existence, is the fact that the IRS recognizes it as a pass-through tax entity. All the profits and losses of the business flow through the LLC without tax. They flow through to the business owner's individual tax return. In a C corporation the profits of the corporation are taxed, and then taxed again when a dividend is paid to the shareholder. However, with proper planning, this double taxation of the C corporation can be minimized. In a S corporation, profits and losses flow through the corporation, thus avoiding the double taxation, but may only be allocated to the shareholders according to their percentage of ownership interest.
