Limited Liability Companies (LLC)
An LLC can generally provide advantages of a limited partnership or an S corporation without associated advantages. LLC is treated like a partnership for income tax purposes and like a corporation for liability purposes. An LLC that elects to be treated as a partnership for income tax purposes will cause the income, gains, losses, deductions and credits to flow through to its members for reporting on their personal income tax returns.
Unlike a limited partnership, no LLC members need be personally liable for the company’s obligations, and each member is permitted to manage the company and to take part in the control of the business without losing the member’s limited liability.
An LLC does not have disadvantage of an S corporation such as the requirements that the corporation have only one type of stock and that the items of income, gain, loss, deduction, or credit be taken into account in accordance with the shareholders’ pro rata share of the corporation’s stock.
Furthermore, only individuals, estates, certain types of trust and certain types of tax-exempt organizations are eligible S corporation shareholders. Finally, the pass-through income tax treatment offered by an S corporation differs somewhat from that of a limited partnership, and this differential treatment can sometimes have adverse tax consequences.
An LLC carries out its function as outlined in its operating agreement. An operating agreement typically covers, among other things, the members’:
- obligation to contribute capital;
- allocations of profits and losses;
- shares of distributions; and
- management and voting rights.
An LLC must pay a tax of $800 per year just for existing as an LLC. This
is the same for limited partnerships; S corporations like corporations do not pay this tax for their first year of existence, but do pay it from second year onward.
An LLC can be managed by all members (member managed LLC) or by one or more managers (manger managed LLC).
In a member managed LLC any act of a member for an apparent purpose of carrying on in the usual way the affairs of member managed LLC binds the LLC. Since an LLC can have many members, this can create serious discord and liabilities for LLC.
In a manager managed LLC only the manager’s act for an apparent purpose of carrying on in the usual way the affairs of member managed LLC binds the LLC. This may reduce some of the problems of the member managed LLC mentioned above.
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