Limited Liability Companies Important Facts

The fairly new and popular LLC is known as a hybrid business structure that offers the tax benefits of a partnership, and limited liability of corporations. It has grown in popularity since it's start in Wyoming in 1977.
  • Unless the company elects to be taxed like a corporation, they will automatically be taxed like a partnership.
  • LLC's are created at the state level and subject to operate and be formed according to state laws. 
  • Like a corporation, LLC's are treated as a legal person that can sue or be sued.
  • LLC's can enter into contracts.
  • LLC's can be designated as Ltd., Limited, A Limited Liability Company and must be displayed after names of businesses operating as such.
  • Texas allows for single member LLC's, but some states require at least two members to form an LLC.
  • One member LLC's are automatically taxed as sole-proprietorship unless specific instructions are given to be taxed as a corporation.  
ADVANTAGES

One of the most attractions of this business form is that unlike a corporation, the LLC will not pay taxes. Instead, members of the company pay taxes personally on earnings as money passes through the company.

Members also have the option to not pay the profits to the members, rather reinvest it into the company. In this case, taxation as a corporation is most beneficial because income tax rates for corporations are often lower than personal income tax rates.

This flexibility in regards to taxation is what makes this business form attractive to most business owners. This kind of arrangement makes it easy for entrepreneurs to protect their personal assets while operating a separate entity.





DISADVANTAGES

There are relatively few disadvantages for operating as an LLC. Because LLC's are formed according to state rules, until all states adopt the Uniform Limited Liability Company Act (ULLCA), operating an LLC in one state will not be the same as another. Businesses will have to check with state law, which is sparing at best.

Lack of case law dealing LLC's is another issue that business owners should consider as well. There is little guidance as the business form is fairly new.

LLC OPERATING AGREEMENTS 

Limited Liability Company Operating Agreements are explicit and written agreements that members use to communicate important operational details, such as:

  • procedures for hiring and removing managers
  • when and why formal meetings would be held
  • how voting rights are distributed
  • operational instructions for various departments 
  • how profits will be divided
  • how certain aspects of business will be managed
  • what to do upon death of members
  • what to do if one member decides to leave
  • important issues so that business can operate efficiently in times of unforeseen circumstances
Most state LLC laws agree with the ULLCA that unless stated within the articles of organization, LLC's will be member-managed. However, LLC's can also operate as manager-managed entity where the management  has the duty of loyalty and care just like corporate directors and officers operate in good faith on behalf of the corporation and its shareholders. 


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28 comments:

  1. One BIG REASON to form an LLC.
    As opposed to a partnership, where each partner receives distributions (or losses) in proportion to its share of the entity, or an S-designated corporation, where the profits or losses flow to the owners in relationship to their ownership, the LLC has NO SUCH requirement.
    The entity can elect (differently EACH year) to appropriate profits and losses any way they see fit. 100% to one, 50/50, in proportion to their ownership- whatever.
    And, very few states (since the Feds allow same) disallow single member LLC's. The only advantage to that is to protect one's own property from being integral to the entity.

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