What is limited liability company?

June 21, 2010

1. Nature of limited liability company

A limited liability company (LLC) is a type of business structure that is allowed by a state statute. The owners of an LLC are known as members (not partners or shareholders).

This business structure is relatively new in the US and provides advantages such a limited liability to owners, reduced paperwork, and some options about taxation.

Most states have no restriction on the number of members that can own an LLC. The ownership can consist of one or more members. The US Internal Revenue Service notes that members of LLC organizations can include individuals, corporations, other partnerships and foreign entities. The federal government does not recognize an LLC as a separate taxable structure. Therefore, an LLC can be classified (upon proper election by owners) as a sole proprietorship or corporation in the case of a single-member LLC and a partnership or corporation for a multiple-member LLC.

2. Advantages of limited liability company

Limited Liability: One of the primary advantages of an LLC business structure is that, similar to corporations, it enables the LLC members to have limited personal liability for the actions and debts of the organization. Typically, all members of an LLC are shielded from the debts of the company, unless they take affirmative action for the debt. An example of this would be if a member personally guarantees a loan from a lender.

Taxation Options: As noted above, LLC members can elect how they would like the LLC to be treated for the federal taxation purposes. For example, an LLC can elect to be taxed as other pass through entities. In this form of taxation, the company needs to provide the Internal Revenue Service with the correct forms indicating its income and other required business activities. However, the organization is not required to pay taxes on this income at the LLC level (as is the case in a corporation). The burden of taxation is passed through to the members of the LLC. In this way, the income from the business is only taxed one time.

No Minutes Requirement: An LLC is not required to maintain minutes of shareholders' meetings. This provides additional benefits in comparison with a corporation where such minutes are required.

3. What are the disadvantages of a Limited Liability Company?

Cost to Operate: Some states levy high initial and annual filing fees to become and maintain an LLC status. In addition, in some states an LLC will have to pay franchise taxes besides what the LLC members will pay as income tax on their tax returns.

No Stock: A corporation has stock as evidence of ownership in it. Such stock can be transferred to other parties and this process may be easier than transferring ownership rights in an LLC.

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