LLCs - Limited Liability Companies

The popularity of limited liability companies has grown during the past ten years. LLCs have the advantage of providing limited liability protection found with a corporation and the flexibility of a partnership.

Owners of an LLC are members. In most states, a one-member (single member) LLC is recognized. In addition, multiple member LLCs are recognized by all states. Members receive the same liability protection as shareholders in a corporation and limited partners in a limited partnership. The personal liability of a member is limited to his capital contributions plus any debts personally guaranteed. Unlike a limited partner, a member can be actively involved in the daily operations of the business without risking the liability protection.

Generally, an LLC is managed by its members. The LLC will be managed by all of the members based upon some type of vote or consensus. Management provisons are set forth in the operating agreement. However, some LLCs elect a management committee and/or one person to manage the daily affairs of the business therefore choosing centralized management.

While it is not required that an LLC have a written operating agreement, many potential management and operating problems are solved by the terms of the operating agreement.

A single-member LLC will be taxed as a sole proprietorship for federal tax purposes. The single-member LLC does not have a separate tax existence unless the individual elects to have the single-member LLC taxed as a corporation by filing Form 8832. The same accounting and tax treatment of a proprietorship continues after an LLC is formed. The single member LLC continues to file Schedule C for federal income tax purposes. A federal identification number is not required if the business has no employees.

LLCs that have multiple members will want to have the business taxed as a partnership. In most states, the members have the choice between partnership and corporate taxation. This is perhaps the single most important advantage of an LLC. For income tax purposes, the LLC will be treated as a general partnership and the members will be treated like general partners. For self-employment tax purposes, an LLC is treated similarly to a limited partnership.