The Limited Liability Company ("LLC") gives its owner the liability protection of a corporation, combined with relatively informal management. The owners of an LLC are called Members, rather than shareholders or partners. An LLC can be formed in any of the 50 United States, and most states allow single-member LLC�s. Management can be by the members, or the members can appoint managers to run the business of the LLC. Appointment of officers and directors is optional. However, there are some formalities that must be observed by the members of an LLC, such as keeping members� personal assets and company assets separate.
Like the corporation, the LLC is a unique legal person, created by permission of the state. One of the most difficult concepts for a new LLC owner to grasp, especially where he or she is the only member, is that the LLC�s assets belong to the LLC, not to the individual member(s); and the individual members� assets belong to the individuals, not to the LLC. The following examples illustrate what this means in terms of day-to-day operations:
In order to form an LLC, the members must file Articles of Organization with the Secretary of State of the state where they wish to establish the LLC. Like corporations, LLC's can do business in more than one state, but if they do business in states other than the state where it was first registered, the LLC must first obtain a Certificate of Authority from the Secretary of State of each other state where the company does business.
Federal tax law allows the members of a LLC decide whether they want the LLC to be taxed as a corporation. To be taxed as a corporation, the members will have to file an election on Form 8832 (C corporation) or Form 2553 (S corporation). The default position for the LLC, if no election is filed, varies depending on the number of members. In the absence of an election, a single member LLC will be considered a "disregarded entity" for tax purposes. The member will report income and expenses on Schedule C of his or her individual income tax return, as though the business were a sole proprietorship. LLC's with two or more members will be taxed as partnerships in the absence of an election, and will report income and expenses on Form 1065.
LLC owners are sometimes concerned if they go with the default tax treatment for the LLC, that they will lose their liability protection. This is not the case. State law governs whether or not the owner of a business will be personally liable for all the debts of the business. And under state law, LLC members enjoy limitations similar to those of corporate shareholders.
Unlike S-corporations, which have restrictions on types of shareholders and classes of stock, LLC's can have members that are corporations or other LLC's or non-resident aliens. They can also have forms of membership that are similar to preferred stock.
Barbara Lamar is the founder of Lamar Law, PLLC - A Business and Tax Law Firm with a Focus on Small Business. Lamar Law offers you the expertise you would hope to find in a large firm. We take a personal interest in your business - to help you plan, maximize profits, minimize risk, identify options, overcome obstacles and maintain control of your personal life while achieving your business goals.
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