Limited Liability Companies combine the best legal and tax characteristics of corporations and partnerships (as well as sole proprietorships for Single Member LLC’s) 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 AN 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 interests, 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.)
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 a 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.”
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.
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. The legal fees for forming an LLC are low, especially when you consider the protection a properly formed LLC affords. Often, poorly drafted and incomplete formation documents that are self-prepared result in unwanted litigation down the road, especially where there is no operating agreement.
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
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.