Wednesday, August 6, 2014

What is an LLC? Why is an LLC preferable to a corporation and partnership in some situations?

A limited liability company is a hybrid business entity that combines features of both corporations and partnerships.  LLCs have been in existence for about three decades but are still not understood by the general public.  

"Limited liability" means that the individual owners cannot be held liable for the debts of the company.  You can sue the company itself to collect a debt, but as a general rule, you cannot sue owners/members of the LLC individually to collect the company's debt. 

A limited liability company's structure is often similar to a corporation, but for tax purposes it can be treated as a partnership- what the accountants call a "pass-through entity".  An accountant each year would likely need to apportion each member's share of the income and expenses for tax purposes.  The LLC in most cases does not itself pay income taxes, though it can under some circumstances depending on the state and how the LLC is structured.

An LLC has "members" rather than shareholders or partners.  The members hold "units" rather than shares, and the distribution of ownership is usually described in the operating agreement.  Some LLCs issue unit certificates of membership, though few jurisdictions requirement them.  Units are not publicly traded.

LLCs are commonly used for holding land or businesses.  An LLC, for instance, might be formed to hold each of several timber properties.  A restaurant chain might hold the land in one LLC, the ground lease with another, and operations with a third.  If several cousins share in land or a business as passed from their grandparents, it may be to their advantage to form an LLC and trade their respective interests for memberships in the LLC.  They could unify their ownership under the LLC's manager, who might operate the business or rent the property without needing unanimous consent of the members for every decision.  

The laws governing LLCs vary from state to state, so anyone wanting to form an LLC should consult a licensed attorney.  "Cookie-cutter" forms do not always work.  Without proper attention to detail, the LLC might not receive the wanted tax treatment, enjoy limited liability, or have management appropriate to the specific owners and their interests.  

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