Limited Liability Company
A limited liability company, or LLC, is somewhat of a hybrid business entity that provides limited liability protection for its owners, called members, yet offers partnership-like tax treatment.
LLC’s have become increasingly popular since their inception in the 1990’s, when state lawmakers across the United States sought to combine the liability protection offered under the corporate entity structure along with partnership-like tax treatment available in other organizational structures. Similar to a corporation, an LLC is formed by filing Articles of Organization with the Secretary of State. After this filing is approved, the LLC must obtain a federal tax identification number, or FEIN, for income reporting purposes.
An LLC is governed by an operating agreement, which is an agreement executed by the members containing the rules and organizational structure needed to sustain the entity. This type of governing structure generally provides more flexibility, particularly in constructing compensation disbursements to the respective members. Additionally, all members of an LLC may agree to participate in the entity’s management and may choose to establish voting rights between managing and non-managing members.
Although a multiple member LLC is required to file a tax return, all tax liability “flows through” to the individual members, resulting in no income tax liability at the entity level.
LLC’s have been popular among real estate investors due to the level of flexibility in structuring management and capital contributions made by the members. Nonetheless, LLC’s have gained wide acceptance among other areas of business.
LLC’s, however, can be costly to establish. Competent counsel should be engaged to discuss whether the higher costs of establishing an LLC will prove to be a wise investment for your business needs.