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Limited
Liability Company
source
by: wikipedia.org
Disadvantages
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Although there is no statutory requirement for an operating agreement
in most states, members of a multiple member LLC who operate without
one may run into problems as, unlike state laws regarding stock corporations,
which are very well developed and provide for a variety of governance
and protective provisions for the corporation and its shareholders,
most states do not dictate the governance and protective provisions
for the members of a limited liability company. Thus, in the absence
of such statutory provisions, the members of an LLC can only establish
governance and protective provisions pursuant to contract, in the
form of an operating agreement.
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A corporation has stock, which makes selling one's interest in the
corporation much more straightforward than with an LLC.
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It
may be more difficult to raise financial capital for an LLC as investors
may be more comfortable investing funds in the better-understood
corporate form with a view toward an eventual IPO. One possible solution
may be to form a new corporation and merge into it, dissolving the
LLC and converting into a corporation.
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Many
states, including Alabama, California, Kentucky, New York, Pennsylvania,
Tennessee, and Texas, levy a franchise tax or capital values tax
on LLCs. (Beginning in 2007, Texas has replaced its franchise tax
with a "margin
tax".) In essence, this franchise or business privilege tax is
the "fee" the
LLC pays the state for the benefit of limited liability. The franchise
tax can be an amount based on revenue, an amount based on profits,
or an amount based on the number of owners or the amount of capital
employed in the state, or some combination of those factors, or simply
a flat fee, as in Delaware. Effective in Texas for 2007 the franchise
tax is replaced with the Texas Business Margin Tax. This is paid
as: tax payable = revenues minus some expenses with an apportionment
factor. In most states, however, the fee is nominal and only a handful
charge a tax comparable to the tax imposed on corporations.
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The
District of Columbia considers LLCs to be taxable entities, thus
eliminating the benefit of flow-through taxes by subjecting members
to double taxation.
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Renewal
fees may also be higher. Maryland, for example, charges a stock or
nonstock corporation $120 for the initial charter, and $100 for an
LLC. The fee for filing the annual report the following year is $300
for stock corporations and LLC, and zero for non-stock corporations.
In addition, certain states, such as New York, impose a publication
requirement upon formation of the LLC which requires that the members
of the LLC publish a notice in newspapers in the geographic region
that the LLC will be located that it is being formed. For LLC's located
in major metropolitan areas (i.e. New York City), the cost of publication
can be significant.
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Some
creditors will require members of up-and-starting LLCs to personally
guarantee the LLC's loans, thus making the members personally liable
for the debt of the LLC.
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The
management structure of an LLC may be unfamiliar to many. Unlike
corporations, they are not required to have a board of directors
or officers.
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Taxing
jurisdictions outside the US are likely to treat a US LLC as a corporation,
regardless of its treatment for US tax purposes, for example if a
US LLC does business outside the US or a resident of a foreign jurisdiction
is a member of a US LLC.
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The
LLC form of organization is relatively new, and as such, some states
do not fully treat LLCs in the same manner as corporations for liability
purposes, instead treating them more as a disregarded entity, meaning
an individual operating a business as an LLC may in such a case be
treated as operating it as a sole proprietorship, or a group operating
as an LLC may be treated as a general partnership, which defeats
the purpose of establishing an LLC in the first place, to have limited
liability (a sole proprietor has unlimited liability for the business;
in the case of a partnership, the partners have joint and several
liability, meaning any and all of the partners can be held liable
for the business' debts no matter how small their investment or percentage
of ownership is).
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The
principals of LLCs use many different titles—e.g., member,
manager, managing member, managing director, chief executive officer,
president, and partner. As such, it can be difficult to determine
who actually has the authority to enter into a contract on the
LLC's behalf.
Variations
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A Professional Limited Liability Company (PLLC, P.L.L.C., or P.L.)
is a limited liability company organized for the purpose of providing
professional services. Usually, professions where the state requires
a license to provide services, such as a doctor, chiropractor, lawyer,
accountant, architect, or engineer, require the formation of a PLLC.
However, some states, such as California, do not permit LLCs to engage
in the practice of a licensed profession. Exact requirements of PLLCs
vary from state to state. Typically, a PLLC's members must all be professionals
practicing the same profession. In addition, the limitation of personal
liability of members does not extend to professional malpractice claims.
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A Series LLC is a special form of a Limited liability company that
allows a single LLC to segregate its assets into separate series. For
example, a series LLC that purchases separate pieces of real estate
may put each in a separate series so if the lender forecloses on
one piece of property, the others are not affected.
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