Legal Structures for Your Small Business – the Limited Liability Company (LLC)

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the Limited Liability Company (LLC) legal structureThe limited liability company (LCC) is neither a corporation nor a partnership. It is the type of business structure that combines the benefits of liability protection afforded to shareholders of a corporation with the favorable tax treatment given to partnerships and their partners. LCC owners are generally called members and people who operate the business are called managers. The members elect the managers. An LCC must be formed by at least two members. Corporations are usually eligible to become members of an LCC.

The biggest advantage of an LCC is that unlike the regular corporation, it is not liable for federal income taxes. As in a partnership, income or loss thereof is passed directly to members and reported on their respective personal tax returns. The advantage of forming an LCC over a partnership is that members are only liable for debts up to the level of investment they contributed to the business and not for all debt like in the partnership. In an LCC all owners are allowed to participate in management of the business and it offers the same limited liability of the corporate structure.

It seems if you look at all the listed advantages, the LCC might be a better choice than the S Corporation that we just discussed in a previous article. LCC’s aren’t subject to the substantial rules governing S Corporations. S Corporations are also limited by the strict rules on who may be chosen as shareholders (shareholders have to be citizens or residents etc). S Corporations are also limited to issuing only common stock and the allocation of profits and losses must be proportionate to shareholders ownership. The LCC provides much more flexibility in distributing and allocating profits and losses.

Forming an LCC is like forming a limited partnership. Articles of organization must be filed in the state in which you plan to do business. There must also be an operating agreement that spells out the details of how the business will be operated and how profits and losses will be shared. Business attorneys can help you draw up these documents and I would suggest you take any help you can to do this properly so you can gain all the advantages this form of business can and should give you.

The LCC has some disadvantages as well. Unanimous written consent of all members is required to admit new members or to transfer a member’s interest, since this is much like a limited partnership. Additional restrictions are placed on the LCC’s ability to continue should a member choose to withdraw. These restrictions are normally tax-driven.

Another disadvantage is the higher legal costs since it is more expensive to from an LCC than a corporation. There are no standard documents to use as a model in most cases. The operating agreement must be made specifically for each venture and normally requires the services of a good corporate lawyer or attorney.

The LCC is a good planning tool though. It is an attractive legal structure because it provides tax savings, shields members from personal liability and provides a very high level of participation in the management of the business for all members. It is simple and flexible and because of this it is very popular. It is normally used in many real estate businesses as well as oil, gas and mining businesses.

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