Limited Liability Corporation (LLC) defined

As a business owner you are faced with having to make many important decisions regarding the structure of your business. One of the most influential of these organizational or structural decisions may be to decide whether or not a limited liability corporation (LLC) is right for you. The first question that you may find yourself asking yourself is, "What exactly is a limited liability corporation?" A limited liability corporation can mean slightly different things to different people and legal entities.

For example, the IRS recognizes that the limited liability business structure is so appealing because they are similar to a corporation in that owners have limited personal liability for the debts and actions of the LLC. Unlike a sole proprietorship, members of the LLC do not put their personal assets at risk when the business takes a turn for the worst. Other features of LLCs are similar to a partnership in that the limited liability corporation provides management with flexibility as well as the benefit of "pass-through" taxation. The IRS makes clear that a few types of businesses generally cannot be LLCs, such as banks and insurance companies and there are special rules for foreign LLCs operating in the United States. Naturally the IRS has more to say on this topic and you can find more information about what they have to say about LLCs and how you will need to handle your tax responsibilities as a member of an LLC by referring to Publication 3402 which is entitled, "Tax Issues for Limited Liability Companies."

If there is one other professional opinion that you ought to have in making sure that you have the right definition for what a limited liability corporation is, it is probably going to have to be from the legal world. According to one legal dictionary, "A limited liability company ("LLC") is as a legal entity that is a hybrid between a partnership and a corporation. The owners (called "members") have many of the same tax benefits as a partnership, while at the same time being able to take advantage of the limited liability characteristics of a corporation. Like a corporation, the members of an LLC are generally shielded from personal liability for the debts and obligations of the company." In summary, the legal definition goes on to point out that another advantage of an LLC over a corporation is that there is more flexibility in management. The legal world and the political world agree that the LLC is often the business structure of choice for new business owners because of the protection from personal liability and the freedom that the flexibility of the ownership structure provides.

Even with these slight differences that you may find, there are some basic principles and defining terms of a limited liability company that remain constant. A limited liability corporation is a type of business ownership combining several features of corporation and partnership structures yet it is clearly not a corporation or a partnership. A limited liability corporation is more correctly termed a limited liability company. Owners of a limited liability company are called members of that LLC not partners or shareholders and owners could actually be individuals, corporations, or other LLCs.

Advantages of a limited liability corporation

It is helpful to define what a limited liability corporation is by comparing it to other business types. Learning about the advantages that a limited liability corporation has over the alternative organizational structures can help the individual business owner in deciding which of all the business structures is right for them and their company. Here is a brief list of some of the advantages of a limited liability corporation:

• Limited liability protection - Easily it is the limited liability protection that an LLC provides that stands as its greatest advantage Owners of a LLC have the liability protection of a corporation. An LLC exists as a separate entity from its members. In terms of personal liability, this means that those owning members cannot be held personally liable for debts incurred by the business (with very few exceptions such as the signing of a personal guarantee).
• Flexible profit distribution - Limited liability companies are not obligated to select one form of profit distribution. Differing levels of distribution can be set based on variables such as invested capital in the company and time spent building the company.
• No requirement for meeting minutes - Corporations are required to keep formal minutes of their meetings. They are also required to record resolutions. In contrast the LLC business structure requires no corporate minutes or resolutions and is therefore easier to operate when there is no looming requirement for such structured and formal meetings.
• "Flow through" taxation - The term "flow through" is commonly heard when people talk about taxation and LLCs. This is because the "flow through" taxation principle refers to the fact that all of the company's business losses, profits, and expenses flow through the company to the individual members. Double taxation is avoided because members of the LLC are not required to pay both corporate taxes and individual taxes.
• Flexibility in management - An LLC may be managed solely by its members, by its members and a management committee serving in a function similar to the board of directors of a corporation or by its members, a management committee, and officers.
• Growing popularity - Although the limited liability company structure is relatively new when compared to the history of the other business types, most states recognize the LLC as a business structure and allow for the registering of such a business in their jurisdiction.

Disadvantages of a limited liability corporation

• Limited life-span - A limited liability company cannot live forever. If a member of the LLC dies or undergoes bankruptcy, the LLC is dissolved. Conversely other business structures such as the corporation, are able to live on even after founding members have moved on or been replaced.
• No issuing of stock for increased capital - If you are planning on taking your company public and using shares of stock as a means of financing your business, you would be better off doing so under the corporate business structure, not the LLC. LLCs usually have a less professional stigma attached to them making them seem less credible to investors than a corporation.
• Not the most simple business structure - Choosing to become a limited liability corporation is not the simplest option available for the new business owner or entrepreneur. Running a sole-proprietorship or partnership, for example would have less paperwork and complexity. In establishing an LLC you must take care of two necessary actions. They are the filing of your company's Articles of Organization and drafting an Operating Agreement. Both actions may require the payment of fees to the state as well as legal consulting fees to ensure that these documents are drafted correctly.
• LLC rules vary from state to state - Each state has different rules governing the formation of a limited liability company. For example, some states will want a publication notice with the local newspaper that a company has been formed. Other states will not allow for the formation of specific types of LLCs. You will need to check with your local state office for further details and you must realize that you may not even be allowed to legally form an LLC in the state in which you reside.
• Limited liability companies are still very new - LLCs have not been around as long as corporations, so people who you will have to work with may not be as familiar with LLCs and the laws by which they are governed. This can make doing business even more complicated if, for example, bankers, insurance agents, CPA's even some lawyers are not able to help you and your business achieve certain objectives.
• Limited liability is not the same as no liability - Even though with an LLC you have the advantage of limited possible personal losses, at-risk limitation, basis limitation on losses, passive loss limitations and investment interest limitations are all still in effect making the possibility for substantial loss very real.
• Tax situations may change - Although you may avoid double taxation as a member of a limited liability company, individual alternative minimum tax consequences may arise requiring you to pay more in taxes than you might have originally anticipated.

Conclusion

In reading this article, hopefully you have been provided with the information that you need not only to determine what the basics of a limited liability company are, but also to make some primary decisions as to whether or not this business structure is the right one for your own business. Also keep in mind that not all advantages listed, and likewise not all disadvantages listed, will be applicable to your specific situation. This decision is one that will have long term effects on your company; it may be wise of you to seek tax and legal counsel to determine the best choice for your individual circumstance.