Limited Liability Company (LLC)
Since 1988, interest in a new type of business entity, the Limited Liability Company (LLC), has increased all over the country. This interest was magnified due to an IRS ruling that an LLC can enjoy the same tax flow status as a partnership. In addition to this benefit, a Limited Liability Company can provide the same limited liability for its members as is provided by a corporation.
Thus a LLC is a hybrid – a combination of a corporation and a partnership. This is an advantage over an “S” corporation when the entity cannot meet the requirements of an “S” corporation but desires the advantages of the tax pass-through.
The LLC was originally created by statute in Wyoming in 1977. It has since been accepted in all other states. Each individual state however, treats an LLC differently. For example, in Nevada the law simply states that members are limited in their liability, whereas in California it states the same and then goes on with a page of exceptions.
Recently, the U.S. Internal Revenue Service has amended rules pertaining to LLCs. Now, an LLC is no longer required to avoid two of the four corporate characteristics. Those being:
- Limited Liability
- Centralized Management
- Relatively free transferability of interest
- Continuity of life
What are some of the advantages and benefits of an LLC? Advantages and benefits include:
- Income can be spread to family members to lower your income tax.
- An LLC is not limited to 35 shareholders (as in an “S” corporation).
- The LLC limits the liability of its members.
- Profits of an LLC do not need to be distributed according to percentage of ownership. Example: 4 owners with 25% ownership each but only 2 of the owners are actually working the business. The Operating Agreement can written so that the 2 working owners receive 80% of the profits while only owning 50% of the business.
Some additional benefits of a Nevada LLC
There are no state level taxes including:
Benefit 1: NO LLC INCOME TAX
Benefit 2: NO PERSONAL INCOME TAX
Benefit 3: NO FRANCHISE TAX
What are some of the disadvantages of an LLC? Disadvantages include:
- It is a relatively new entity (as compared to Corporations) and there is not as much case law to determine how the courts will treat an LLC. This has been changing over the years and both Nevada and Wyoming have developed case law to help determine in certain cases how the courts will rule.
- Interests are not freely transferable.
- LLC’s are treated differently in different states.
- Lifetime may not be limited but if you chose this feature then to be taxed as a partnership you will have to give up either the limited liability characteristic or the centralized management characteristic for this reason most people chose a lifetime of 30 years.
- Lack of privacy (all income reported on personal income tax).
- C-Corporations have many tax write off’s that an LLC does not. One example of this is the Medical Reimbursement Plan that a C-Corporation can utilize while LLC members are not allowed to. This can result in very significant tax savings.
A Limited Liability Company is an area of developing law and it will take a few years to firmly establish the rules and laws governing them. In the meantime, they do have their place but much thought needs to go into the decision to use an LLC over a corporation.
The goal of most any business owner is to provide high quality goods and services to customers with the intent of growing your business into a thriving entity. While most businesses start out as a sole proprietorship or partnership, this operational structure is not beneficial when a business starts to grow and evolve. When your business has achieved a certain amount of success and growth you will likely want to explore your options as far as the structure of your business is concerned. Whether you should form a S Corporation, C Corporation, or Limited Liability Corporation (LLC) will depend upon the specific goals you have personally and your future business plans. One major factor to consider when making this decision is what the rules and regulations are in the state which you plan to incorporate. For example, a Nevada LLC offers many advantages for small to medium sized businesses. You can read more below about how a Nevada LLC business structure can help benefit you and your business.