A limited liability company (denoted by L.L.C. or LLC) is a legal form of business company in the United States (and also in United Arab Emirates) offering limited liability to its owners.
In that respect, it is similar to a corporation, and is often a more flexible form of ownership, especially suitable for smaller companies with a limited number of owners. Unlike a regular corporation, however, a limited liability company with one member may be treated as a disregarded entity, so the member is often singled-out as a person performing the actions of the LLC. A limited liability company with multiple members is typically treated as a partnership for tax purposes, thereby avoiding double taxation. An LLC can elect to be either "member managed" or "manager managed". Choosing to operate as member management creates a flat member or partnership structure. Choosing manager management creates a two-tiered management structure potentially convertible into a corporation, with the attendant tax consequences. LLCs use IRS Form 1065 and Schedule SE (Self-Employment Tax). It is often incorrectly called a "limited liability corporation" (instead of company). LLCs are organized with a document called the "articles of organization", or "the rules of organization" specified publicly by the state; additionally, it is common to have an "operating agreement" privately specified by the members.
Operating as an LLC form of partnership does not mean that appropriate federal partnership tax forms are not necessary, or not complex. As a partnership, the entity's income and deductions attributed to each member are reported on that owner's tax return.
LLCs can lose their tax advantage without the partnership structure. The possible label "disregarded entity" for income tax purposes singles out the one-member owner of an LLC as actually earning income and deductions directly. It is the owner, then, who reports as a business proprietor, rather than as an LLC operating an active trade or business. An LLC passively investing in real estate and owned by a single member would have its income and deductions reported directly on the owner's individual tax return on a Schedule E tax form. And an LLC owned by a corporation--in other words, an LLC with a single corporate member--would be treated as an incorporated branch and have its income and deductions reported on the corporate tax return, creating double taxation.
LLCs were first enacted by the state of Wyoming but can now be created under the laws of any U.S. state. They were chiefly inspired by the GmbH, a type of business organization in Germany, and by limitadas, a type of business organization available in many Latin American countries.
Contents
1Advantages
2Disadvantages
3Other countries
3.1England, Wales and Northern Ireland
3.2Japan
4See also
5References
6External links
Advantages
No requirement of an annual general meeting for shareholders.
No loss of power to a board of directors.
Much less administrative paperwork and recordkeeping.
Pass-through taxation (i.e., no double taxation), unless the LLC elects to be taxed as a corporation using IRS Form 8832.
Limited liability, meaning that the owners of the LLC, called "members," are protected from liability for acts and debts of the LLC.
Using default tax classification, profits are taxed personally at the member level, not at the LLC level.
Check-the-box taxation. An LLC can elect to be taxed as a sole proprietor, partnership, S-corp or corporation, providing much flexibility.
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 (i.e., See VA and Delaware LLC Acts).
LLCs in some states are treated as entities separate from their Members (See VA LLC Act), whereas in other jurisdictions case law has developed deciding LLCs are not considered to have separate juridical standing from their members (See recent D.C. decisions).
Disadvantages
Many states, including Alabama, California, Kentucky, New Jersey, 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.
It may be more difficult to raise 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.
Although there is no public requirement for an operating agreement, members who operate without one may run into problems.
Some people, such as new business people, may not be familiar with the governance of LLCs. Unlike corporations, they are not required to have a board of directors or officers.
The principals of LLCs use many different titles -- e.g., member, manager, managing member, chief executive officer, president, partner -- some of which are not correct. As such, it can be difficult to determine who actually has the authority to enter into a contract on the LLC's behalf.
All income members receive is taxed at ordinary income rates and subject to FICA tax.
Other countries
England, Wales and Northern Ireland
In 2002, the UK legislated limited liability partnerships ("LLPs") into existence, which approximate LLCs in the USA (unlike private company limited by shares, Ltd. or P.L.C.). Member partners are taxed at the partner level, yet the LLP provides limited liability for the member partners.
Japan
Japan passed legislation in 2006 creating a new type of business organization, godo kaisha, a close variant of the American LLC.
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