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LLC-LIMITED LIABILITY COMPANY
A
limited liability company (LLC) is a business structure that has both the
characteristics of a partnership and a corporation. The owners of the company
are protected from personal liability and all profits and losses, as well as
taxes pass directly to the owners. A limited liability company is not subject to
tax.
The two of most important characteristics of
partnerships and corporations that LLCs have are:
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like a partnership it is given a
pass through tax treatment, i.e. profits and losses are reported on each
owner/member's individual tax return.
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like a corporation the LLC
provides limited liability to its owners/members, which means that creditors
can collect only from the LLCs assets, and not
directly from the owners/members of the LLC.
Practically, an LLC operates like a limited partnership without the requirement for a general partner. Unlike an S corporation, an LLC has no limits on the number of shareholders, classes of stock, or type of shareholders.
An LLC requires two documents.
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The first is a one- or two-page document filed with the Secretary of State with the LLC's name, address, agent for service of process, term, and whether it will be run by the members or managers appointed by the members. This document is generally called a "Certificate of Formation" or "Articles of
Organization."
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Second, a LLC needs an operating agreement, similar to a partnership agreement. An operating agreement specifies how the LLC will be run, the financial obligations of the members, and how profits and losses will be divided. The operating agreement for an LLC can be highly tailored to the members' needs, so entrepreneurs should avoid using boilerplate documents.
Tax restrictions on tax-exempt members of venture capital funds will prevent venture capital funds from investing in an LLC. Because losses pass through, though, an LLC can be attractive to corporate investors and wealthy individuals. An LLC is a good business entity for those wishing to pass through losses to investors because:
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it offers complete liability protection for its members like a corporation;
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it can have corporations and partnerships as members, unlike an S corporation; and
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losses can be entirely allocated to cash investors and
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it can be incorporated, tax free, at any time.
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