A Limited liability company (denoted by
L.L.C. or LLC) is a type of legal entity which has only relatively recently been
made possible to establish in the United States and many other, mainly
anglophone, countries. An LLC is similar to a corporation and a limited
liability partnership. A variant of the LLC available in some jurisdictions,
typically limited to licensed professionals such as lawyers or engineers, is the
professional limited liability company (denoted by "P.L.L.C." or "PLLC").
The concept of an LLC was apparently modelled after the German GmbH (Gesellschaft
mit beschränkter Haftung; LLC is a broad translation of the term). These have
existed in German-speaking countries for some time—in Germany itself since 1892.
The concept was adopted by many English-speaking countries because LLCs have
some advantages over corporations. It is sometimes said that an LLC is "kind of
a 'light' version of an Inc. or Ltd." This is a generalisation, however, and may
be misleading or wrong in some cases.
Basically, an LLC allows for the flexibility of a partnership structure within
the framework of limited liability, such as that granted to corporations.
Another advantage of an LLC over a limited partnership is that the formalities
required for creating and registering LLCs are much simpler than the
requirements most states place on forming and operating corporations; because of
the lack of requirement for annual meetings of shareholders (LLCs have
"members") or bylaws, for instance - however, most LLCs will choose to adopt an
Operating Agreement or Limited Liability Company Agreement to provide for the
governance of the Company, and such Agreement is generally more complex than a
corporation's bylaws.
The primary reason that most businesses choose to be organized as an LLC is to
avoid "double taxation." A traditional corporation is taxed on its income, and
then when the profits are distributed to the owners of the corporation (i.e.,
the shareholders), then those dividends are also taxed. With an LLC, income of
the LLC is not taxed, but each owner of the LLC (i.e., each member) is taxed
based on its pro rata allocable portion of the LLC's taxable income, regardless
of whether any distributions to the members are made. This single level of
taxation can lead to significant savings over the corporate form. Similarly,
under some circumstances, members of an LLC may deduct losses of the LLC on
their personal tax returns.
LLC v. LLP
A limited liability company (LLC) differs from a limited liability partnership (LLP)
in that the LLP has the organizational flexibility of a partnership.
Furthermore, LLCs are more likely to be subject to a state's franchise taxes.
LLC vs. Inc. & Ltd.
Advantages of an LLC
No requirement of an annual general meeting for shareholders
Pass-through taxation (i.e. no double taxation).
Unlike Subchapter S Corporations, pass-through taxation applies even with
entities (rather than individuals) as members, and the number of members is not
limited.
Limited liability (meaning that the owners of the LLC, called "members," are
protected from liability for acts and debts of the LLC)
Profits taxed personally (at the member level, not at the LLC level).
Can be set up with just one natural person involved (in most states), contact
your state's Secretary of State, local chamber of commerce or SBA office to get
more information.
Disadvantages of an LLC
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 initial public offering.
The possible lack of any operating agreement requirement can cause problems
Short life span. Average life span of a LLC is 30 years because of death of one
of the owners. In some cases this rule can be bypassed if there is a consensus
among all the other members. (Most states now allow LLCs to have perpetual
duration (like corporations) and LLCs are generally not dissolved as a result of
the withdrawal of any one member).
Some people, such as new businessmen or low-level clerks, may not be familiar
with the LLC structure and may demand actions by Directors or by Shareholders or
officers. While an LLC may establish something akin to a board of directors and
can designate officers, it is not required to do so. Thus, a low level clerk's
insistence on a signature of a President may require an LLC to appoint a
President in order to get around the red tape.
The source of this article is
Wikipedia, the free encyclopedia. The text of this
article is licensed under the
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