Forming a Limited Liability Company
Limited Liability and Tax Advantages Characterize the LLC
May 8, 2009
The limited liability company became a popular form of business organization when the IRS ruled that LLCs could be taxed the same as partnerships. Now, all 50 U.S. states recognize this form of business entity. Most states allow single-member limited liability companies. As authors Baldwin and Whiteside note in their book Introduction to Business Organizations, the LLC "offers its members an attractive combination of limited personal liability and favorable federal tax treatment."
LLC Features Limited Personal Liability and Pass-through Tax Treatment
The LLC offers full protection for all members for any business liability, whether it arises in tort or in contract. In other words, members in a limited liability company do not risk their personal assets by investing in the business. Additionally, there is no "double taxation" as with the typical corporate form. Profits of the business are taxed only once, as income to the members. This is similar to the single taxation afforded by the sole proprietorship and the S-corporation.
Setting up a Limited Liability Company is Accomplished by Filing Articles of Organization
One sets up a limited liability company by filing articles of organization with the appropriate state agency. These are similar to articles of incorporation one must file to create a corporation. State statutes specify the information that one must include in the articles of organization. According to Baldwin and Whiteside, in most states, the articles must contain at least the following:
- The name of the company.
- The company's duration and purpose.
- The name and address of the LLC's registered agent.
- A statement that the limited liability company will be managed by managers or by members. (A "member" is synonymous with owner or shareholder in the corporate form, and with partner in a partnership.)
- The name and address of each manager, if applicable, or each member.
- The name and address of each organizer. (An "organizer" is similar to an incorporator in the corporate form.)
How Does the Limited Liability Company Compare to the Limited Liability Partnership?
Both LLCs and LLPs offer protection from personal liability and pass-through taxation; however, only "full shield" states offer full protection from liability for LLP partners for both wrongful acts of co-partners and contractual obligations. By contrast, the limited liability company features full protection from personal liability for all members, whether the liability arises in tort or contract.
LLCs may be managed by appointed managers who are not members of the company, while LLPs are usually co-managed by all the partners. This might be an advantage to a business owner who would prefer to bring in outside expertise to run the business. Additionally, most states permit a single-member limited liability company. This makes the LLC an attractive option for someone who wants to go into business alone. An LLP, by contrast, requires at least two partners.
Determining Whether the LLC is the Best Choice for One's Business
There are some obvious advantages to the limited liability company as a form of business organization. Nevertheless, anyone considering launching a business should do careful research into the various forms of business entities available, and should consult with a business attorney and a tax professional before deciding to set up a LLC.
Source: Diane M. Baldwin and Frances B. Whiteside, Introduction to Business Organizations, (2d ed., Pearson 2001).
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