Doing Business as a Limited Liability Company
Since its passage by the California legislature in 1994, the limited liability company has quickly become a popular alternative to doing business either as a corporation or a partnership. In many circumstances, the limited liability company, or "LLC" can provide its proponents with the benefits of a corporate or partnership structure without most of the drawbacks associated with those older and more inflexible forms.
Protection
Against Liability
Like a corporation, the LLC structure provides its members (which are equivalent
to corporate shareholders or limited partners) and its managers (equivalent
to officers, directors or general partners) with unlimited liability against
the entity's debts, liabilities or obligations. This should be contrasted
with a partnership, where the general partners face unlimited personal liability
for the partnership's obligations.
Involvement in Operations
To make matters worse, a limited partner who inadvertently exercises too much
control in the partnership's operations can unwittingly subject himself to
claims that he is a general partner with unlimited liability for the partnership's
obligations. Since an LLC's managers, who are charged with acting on behalf
of the LLC, do not themselves face personal liability, the possibility of
inadvertent liability for an LLC's members simply does not exist.
Double Taxation
Like a partnership, items of profit, loss and deduction pass through to the
LLC's members, and the LLC itself is not subject to tax. This should be contrasted
with most corporations, where profits are taxed twice--first at the entity
level, and following distribution to its shareholders, again at the individual
level.
Restrictions
on Ownership
While freedom from double taxation is available to special corporations known
as "S" corporations, the tradeoff is that there are significant
restrictions on the types of entities that may be shareholders in an "S"
corporation. Thus, for example, most trusts cannot be shareholders of an corporation
without endangering the corporation's tax advantaged status. An LLC, on the
other hand, has no restriction on the type of persons or entities that may
own its interests. An "S" corporation has additional restrictions
on distributions and choice of accounting year not found with LLC's which
may further impact on an "S" corporation's desirability.
Flexibility in Management
Unlike most corporations or partnerships, an LLC has great flexibility in
the manner in which it is structured. For example, unlike a partnership, an
LLC may elect officers, in addition to its managers. Moreover, unlike a partnership,
the LLC's managers need not also be owners. On the other hand, in most states,
the LLC must have at least two members, and is therefore not usable by a single
business owner.
Conclusion
In conclusion, as evidenced by its surging popularity, the LLC is a welcome
addition to the array of available business formation structures. While no
one structure is right for every situation, the LLC may be worth a closer
look. We at Schelberg & Ross welcome the opportunity to discuss the benefits
and disadvantages of this new vehicle for your business.
