Any time two or more people are in business together, one of their most important decisions is what kind of business form to use. They can be a general partnership, limited partnership or corporation. A relatively new form of business entity that all states now allow is a “limited liability company.” It’s not a corporation or partnership, but it offers some of the best features of each.
Some factors people consider when selecting which business form to use are how to protect personal assets from debts and liabilities of the business and which entity helps lower their taxes. Usually a general partnership helps lower taxes, but the partners have unlimited personal liability for debts of the partnership and any injuries the business causes. A corporation protects against unlimited personal liability, but profits get taxed twice if they're given to the owners.
A special kind of corporation, called an “S” corporation, helps avoid double taxes on profits. But the rules to be an “S” corporation can be complex and there are significant restrictions on who can be owners. Limited partnerships help limit the personal liability of partners who are not active in running the business. But benefits of a limited partnership can be lost if someone takes an active role in managing the business.
Features of Limited Liability Companies
The “limited liability company” (“LLC”) was created to provide several of the best attributes of both corporations and partnerships, including:
• Tax benefits. LLCs offer the pass-through tax benefits of a partnership, meaning each member of the LLC pays taxes based on his or her share of the profits or losses of the business. Unlike corporations, LLCs are not considered separately taxable entities and therefore do not suffer the "double taxation" typically associated with corporations.
• Limited liability. LLCs offer the limited liability protection similar to corporations. This means that people making a claim against the LLC can look only to the assets of the LLC itself to satisfy the claim -- they cannot reach the personal property of the LLC's owners.
Like corporations, the limited liability protection offered by the LLC can be lost under certain circumstances. Perhaps the most common reason for disregarding the limited liability protection is if the owners of the business failed to keep the LLC entity separate from their personal property .
• Flexibility. In several key ways LLCs offer more flexibility than corporations or partnerships. In most states, there’s no limit on the number of members or what types of entities can be owners. In this way, LLCs are better than “S” Corporations, which are limited to 35 shareholders, all of whom must be individuals (not corporations) and U.S. citizens. LLC members can include corporations or other kinds of entities. Most states also permit LLCs with only one owner.
• Control. Limited liability companies offer their owners/members a significant amount of control, including control over who their fellow owners and members will be. The operating agreement for the LLC can restrict a member from selling his or her interest without consent of the other members. This reduces the risk of an owner selling an interest in the LLC to someone who is unacceptable to the remaining members or owners. For example, someone may be unacceptable because he or she does not have enough experience in the particular business or lives far from the headquarters of the business. The members' operating agreement could include any lawful restrictions on who may be an owner. Though these kinds of provisions can be put in documents for a corporation, the process of including them is easier for a LLC.
How LLCs are Created
An LLC is created by filing “Articles of Organization" with the appropriate state agency. The LLC members have an operating agreement which contains the rules of the entity, such as each members' ownership share, rights, how profits and losses are split, how the business is managed, and other aspects of the business.
In most states, LLCs must have a limited lifespan. Typically this can be any length of time the members choose, up to 35 years. The LLC ends automatically when a member dies or the LLC dissolves or becomes bankrupt, unless the other members choose to continue it in effect. Usually, LLC owners cannot freely sell their interest without consent of the other owners.
Anyone forming a new business should consider whether the limited liability company is a form of business they should use. Existing businesses that are set up as corporations, partnerships, “S” corporations or limited partnerships should consider whether they would benefit by converting to a limited liability company. Our law firm can help you in this assessment.
Contact an attorney at DeMarco & Triscaro today. Please call us for all your legal needs. We offer a full range of legal services to individuals, families and businesses, including personal injury, estate planning, real estate, family law and business matters. We are dedicated to providing the highest quality legal services at a reasonable cost. |
