Limited Liability Company

source by: wikipedia.org

A limited liability company (LLC) or, more rarely, a company with limited liability (WLL), is a flexible form of business enterprise that blends elements of partnership and corporate structures. It is a legal form of business company.

Often incorrectly called a "limited liability corporation" (instead of company), it is a hybrid business entity having certain characteristics of both a corporation and a partnership or sole proprietorship (depending on how many owners there are). An LLC, although a business entity, is a type of unincorporated association and is not a corporation.

The primary characteristic an LLC shares with a corporation is limited liability, and the primary characteristic it shares with a partnership is the availability of pass-through income taxation. It is often more flexible than a corporation and it is well-suited for companies with a single owner.

It is important to understand that limited liability does not imply owners are always fully protected from personal liabilities. Courts can and do pierce the corporate veil of LLCs when some type of fraud or misrepresentation is involved, or under certain situations where the owner uses the company as an "alter ego."

Flexibility and default rules

The phrase "unless otherwise provided for in the operating agreement" (or its equivalent) is found throughout all existing LLC statutes and is responsible for the flexibility the members of the LLC have in deciding how their LLC will be governed (provided it does not go outside legal bounds). State statutes typically provide automatic or "default" rules for how an LLC will be governed unless the Operating Agreement provides otherwise.

Similarly, the phrase "unless otherwise provided for in the bylaws" is also found in all corporation law statutes but often refers only to a narrower range of matters.

Income taxation

For LLCs with multiple members, the LLC is treated as a partnership and must file IRS Form 1065. Individual partners would receive a K-1 for their share of income or losses to be reported on that owner's tax return.

As an option, LLCs may also elect to be taxed like a corporation by filing IRS Form 8832. They can be treated as a regular C corporation (taxation of the entity's income prior to any dividends or distributions to the members and then taxation of the dividends or distributions once received as income by the members), or an LLC can elect to be treated as an S-corporation. Some commentators have recommended an LLC taxed as a S-corporation as the best possible small business structure. It combines the simplicity and flexibility of an LLC with the tax benefits of an S-corporation (self-employment tax savings).

Advantages

• Check-the-box taxation. An LLC can elect to be taxed as a sole proprietor, partnership, S corporation or C corporation (as long as they would otherwise qualify for such tax treatment), providing for a great deal of flexibility.
• Limited liability, meaning that the owners of the LLC, called "members," are protected from some or all liability for acts and debts of the LLC depending on state shield laws.
• Much less administrative paperwork and record keeping than a corporation.
• Pass-through taxation (i.e., no double taxation), unless the LLC elects to be taxed as a C corporation.
• Using default tax classification, profits are taxed personally at the member level, not at the LLC level.
• LLCs in most states are treated as entities separate from their members, whereas in other jurisdictions case law has developed deciding LLCs are not considered to have separate legal standing from their members.
• LLCs in some states can be set up with just one natural person involved.
• Membership interests of LLCs can be assigned, and the economic benefits of those interests can be separated and assigned, providing the assignee with the economic benefits of distributions of profits/losses (like a partnership), without transferring the title to the membership interest.
• Unless the LLC has chosen to be taxed as a corporation, income of the LLC generally retains its character, for instance as capital gains or as foreign sourced income, in the hands of the members

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