Limited liability company

A limited liability company (LLC) is the US-specific form of a private limited company. It is a business structure that can combine the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation.[1][2] An LLC is not a corporation under state law; it is a legal form of a company that provides limited liability to its owners in many jurisdictions. LLCs are well known for the flexibility that they provide to business owners; depending on the situation, an LLC may elect to use corporate tax rules instead of being treated as a partnership,[3] and, under certain circumstances, LLCs may be organized as not-for-profit.[4] In certain U.S. states (for example, Texas), businesses that provide professional services requiring a state professional license, such as legal or medical services, may not be allowed to form an LLC but may be required to form a similar entity called a professional limited liability company (PLLC).[5]

A limited liability company (LLC) is a hybrid legal entity having certain characteristics of both a corporation and a partnership or sole proprietorship (depending on how many owners there are). An LLC is a type of unincorporated association distinct from a corporation. The primary characteristic an LLC shares with a corporation is limited liability, and the primary characteristic it shares with a partnership is the availability of pass-through income taxation.[6] It is often more flexible than a corporation, and it is well-suited for companies with a single owner.[7]

Although LLCs and corporations both possess some analogous features, the basic terminology commonly associated with each type of legal entity, at least within the United States, is sometimes different. When an LLC is formed, it is said to be "organized,” not "incorporated" or "chartered,” and its founding document is likewise known as its "articles of organization," instead of its "articles of incorporation" or its "corporate charter.” Internal operations of an LLC are further governed by its "operating agreement," rather than its "bylaws." The owner of beneficial rights in an LLC is known as a "member," rather than a "shareholder.” [8] Additionally, ownership in an LLC is represented by a "membership interest" or an "LLC interest" (sometimes measured in "membership units" or just "units" and at other times simply stated only as percentages), rather than represented by "shares of stock" or just "shares" (with ownership measured by the number of shares held by each shareholder). Similarly, when issued in physical rather than electronic form, a document evidencing ownership rights in an LLC is called a "membership certificate" rather than a "stock certificate".[9]

In the absence of express statutory guidance, most American courts have held that LLC members are subject to the same common law alter ego piercing theories as corporate shareholders.[10] However, it is more difficult to pierce the LLC veil because LLCs do not have many formalities to maintain. As long as the LLC and the members do not commingle funds, it is difficult to pierce the LLC veil.[11][12] Membership interests in LLCs and partnership interests are also afforded a significant level of protection through the charging order mechanism. The charging order limits the creditor of a debtor-partner or a debtor-member to the debtor's share of distributions, without conferring on the creditor any voting or management rights.[13]

Limited liability company members may, in certain circumstances, also incur a personal liability in cases where distributions to members render the LLC insolvent.[14]

History

The first state to enact a law authorizing limited liability companies was Wyoming in 1977. The form did not become immediately popular, in part because of uncertainties in tax treatment by the Internal Revenue Service. After an IRS ruling in 1988 that Wyoming LLCs could be taxed as partnerships, other states began enacting LLC statutes. By 1996, all 50 states had LLC statutes.[15]

Flexibility and default rules

LLCs are subject to fewer regulations than traditional corporations, and thus may allow members to create a more flexible management structure than is possible with other corporate forms. As long as it remains within the confines of state law, the operating agreement is responsible for the flexibility the members of the LLC have in deciding how their LLC will be governed.[16] State statutes typically provide automatic or "default" rules for how an LLC will be governed unless the operating agreement provides otherwise.

The limited liability company ("LLC") has grown to become one of the most prevalent business forms in the United States. Even the use of a single member LLC affords greater protection for the assets of the member, as compared to operating as an unincorporated entity.[17]

Effective August 1, 2013, the Delaware Limited Liability Company Act provides that the managers and controlling members of a limited liability company owe fiduciary duties of care and loyalty to the limited liability company and its members. Under the amendment (prompted by the Delaware Supreme Court's decision in Gatz Properties, LLC v. Auriga Capital Corp),[18] parties to an LLC remain free to expand, restrict, or eliminate fiduciary duties in their LLC agreements (subject to the implied covenant of good faith and fair dealing).[19]

Under 6 Del. C. Section 18-101(7), a Delaware LLC operating agreement can be written, oral or implied. It sets forth member capital contributions, ownership percentages, and management structure. Like a prenuptial agreement, an operating agreement can avoid future disputes between members by addressing buy-out rights, valuation formulas, and transfer restrictions. The written LLC operating agreement should be signed by all of its members.[20]

Income tax

For U.S. federal income tax purposes, an LLC is treated by default as a pass-through entity.[21] If there is only one member in the company, the LLC is treated as a "disregarded entity" for tax purposes (unless another tax status is elected), and an individual owner would report the LLC's income or loss on Schedule C of his or her individual tax return. Thus, income from the LLC is taxed at the individual tax rates. The default tax status for LLCs with multiple members is as a partnership, which is required to report income and loss on IRS Form 1065. Under partnership tax treatment, each member of the LLC, as is the case for all partners of a partnership, annually receives a Form K-1 reporting the member's distributive share of the LLC's income or loss that is then reported on the member's individual income tax return.[22] On the other hand, income from corporations is taxed twice: once at the corporate entity level and again when distributed to shareholders. Thus, more tax savings often result if a business formed as an LLC rather than a corporation.[23]

An LLC with either single or multiple members may elect to be taxed as a corporation through the filing of IRS Form 8832.[24] After electing corporate tax status, an LLC may further elect to be treated as a regular C corporation (taxation of the entity's income prior to any dividends or distributions to the members and then taxation of the dividends or distributions once received as income by the members) or as an S corporation (entity level income and loss passes through to the members). Some commentators have recommended an LLC taxed as a S-corporation as the best possible small business structure. It combines the simplicity and flexibility of an LLC with the tax benefits of an S-corporation (self-employment tax savings).[25]

Advantages

  • Choice of tax regime. An LLC can elect to be taxed as a sole proprietor, partnership, S corporation or C corporation (as long as they would otherwise qualify for such tax treatment), providing for a great deal of flexibility.
  • A limited liability company with multiple members that elects to be taxed as partnership may specially allocate the members' distributive share of income, gain, loss, deduction, or credit via the company operating agreement on a basis other than the ownership percentage of each member so long as the rules contained in Treasury Regulation (26 CFR) 1.704-1 are met. S corporations may not specially allocate profits, losses and other tax items under US tax law.
  • The owners of the LLC, called members, are protected from some or all liability for acts and debts of the LLC, depending on state shield laws.
  • In the United States, an S corporation has a limited number of stockholders, and all of them must be U.S. tax residents; an LLC may have an unlimited number of members, and there is no citizenship restriction.
  • Much less administrative paperwork and record-keeping than a corporation.
  • Pass-through taxation (i.e., no double taxation), unless the LLC elects to be taxed as a C corporation.
  • Using default tax classification, profits are taxed personally at the member level, not at the LLC level.
  • LLCs in most states are treated as entities separate from their members. However, in some jurisdictions such as Connecticut, case law has determined that owners were not required to plead facts sufficient to pierce the corporate veil and LLC members can be personally liable for operation of the LLC) (see, for example, the case of Sturm v. Harb Development[26]
  • LLCs in some states can be set up with just one natural person involved.
  • Less risk of being "stolen" by fire-sale acquisitions (more protection against "hungry" investors).
  • For real estate companies, each separate property can be owned by its own individual LLC, thereby shielding not only the owners but their other properties from cross-liability.[27]

Disadvantages

Although there is no statutory requirement for an operating agreement in most jurisdictions, members of a multiple member LLC who operate without one may encounter problems. Unlike state laws regarding stock corporations, which are very well developed and provide for a variety of governance and protective provisions for the corporation and its shareholders, most states do not dictate detailed governance and protective provisions for the members of a limited liability company. Thus, in the absence of such statutory provisions, the members of an LLC must establish governance and protective provisions pursuant to an operating agreement or similar governing document.

  • It may be more difficult to raise financial 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. One possible solution may be to form a new corporation and merge into it, dissolving the LLC and converting into a corporation.
  • Many jurisdictions—including Alabama, California, Kentucky, New York, Pennsylvania, Tennessee, and Texas—levy a franchise tax or capital values tax on LLCs. 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. In most states, however, the fee is nominal and only a handful charge a tax comparable to the tax imposed on corporations.
    • In California, both foreign and domestic LLCs, corporations, and trusts, whether for-profit or non-profit—unless the entity is tax exempt—must at least pay a minimum income tax of $800 per year to the Franchise Tax Board; and no foreign LLC, corporation or trust may conduct business in California unless it is duly registered with the California Secretary of State.
  • Renewal fees may also be higher. Maryland, for example, charges a stock or nonstock corporation $120 for the initial charter, and $100 for an LLC. The fee for filing the annual report the following year is $300 for stock-corporations and LLCs. The fee is zero for non-stock corporations. In addition, certain states, such as New York, impose a publication requirement upon formation of the LLC which requires that the members of the LLC publish a notice in newspapers in the geographic region that the LLC will be located that it is being formed. For LLCs located in major metropolitan areas (e.g., New York City), the cost of publication can be significant.
  • The management structure of an LLC may not be clearly stated. Unlike corporations, they are not required to have a board of directors or officers. (This could also be seen as an advantage to some.)
  • Taxing jurisdictions outside the US are likely to treat a US LLC as a corporation, regardless of its treatment for US tax purposes—for example a US LLC doing business outside the US or as a resident of a foreign jurisdiction.[28] This is very likely where the country (such as Canada) does not recognize LLCs as an authorized form of business entity in that country.
  • The principals of LLCs use many different titles—e.g., member, manager, managing member, managing director, chief executive officer, president, and partner. As such, it can be difficult to determine who actually has the authority to enter into a contract on the LLC's behalf.

Variations

  • A Professional Limited Liability Company (PLLC, P.L.L.C., or P.L.) is a limited liability company organized for the purpose of providing professional services. Usually, professions where the state requires a license to provide services, such as a doctor, chiropractor, lawyer, accountant, architect, landscape architect, or engineer, require the formation of a PLLC.[5] However, some states, such as California, do not permit LLCs to engage in the practice of a licensed profession. Exact requirements of PLLCs vary from state to state. Typically, a PLLC's members must all be professionals practicing the same profession. In addition, the limitation of personal liability of members does not extend to professional malpractice claims.
  • A Series LLC is a special form of a Limited liability company that allows a single LLC to segregate its assets into separate series. For example, a series LLC that purchases separate pieces of real estate may put each in a separate series so if the lender forecloses on one piece of property, the others are not affected.
  • An L3C is a for-profit, social enterprise venture that has a stated goal of performing a socially beneficial purpose, not maximizing income. It is a hybrid structure that combines the legal and tax flexibility of a traditional LLC, the social benefits of a nonprofit organization, and the branding and market positioning advantages of a social enterprise.
  • An Anonymous Limited Liability Company is a LLC for which ownership information is not made publicly available by the state. This is typically accomplished by using a third-party to act as the organizer and registered agent of the LLC.

See also

References

  1. ^ Schwindt, Kari (1996). "Limited Liability Companies: Issues in Member Liability". UCLE Law Review. 44: 1541. Retrieved 7 September 2017.
  2. ^ "Limited liability company (LLC)". Wex. Cornell Law School. Retrieved 7 September 2017.
  3. ^ "Limited Liability Company (LLC)". Internal Revenue Service. Retrieved 25 January 2018.
  4. ^ McCray, Richard A.; Thomas, Ward L. "Limited Liability Companies as Exempt Organizations" (PDF). Internal Revenue Service. Retrieved 7 September 2017.
  5. ^ a b Akalp, Neil (10 August 2016). "Should You Structure Your Accounting Firm as an LLC, PLLC or PC?". Accounting Today. SourceMedia. Retrieved 7 September 2017.
  6. ^ Larson, Aaron (12 July 2016). "What is a Limited Liability Company (LLC)". ExpertLaw. Retrieved 7 September 2017.
  7. ^ Bischoff, Bill (1 May 2017). "The advantages of owning real estate in a single-member LLC". MarketWatch, Inc. Retrieved 7 September 2017.
  8. ^ Johnston, Kevin. "What Is the Difference Between a Shareholder Vs. a LLC Member?". Hearst Newspapers, LLC. Houston Chronicle. Retrieved 7 September 2017.
  9. ^ Friedman, Scott E. (1996). Forming Your Own Limilted Liability Company. Dearborn Trade Publishing. p. 60. ISBN 9780936894935. Retrieved 7 September 2017.
  10. ^ Macey, Jonathan R. (27 March 2014). "The Three Justifications for Piercing the Corporate Veil". The Three Justifications for Piercing the Corporate Veil. Retrieved 7 September 2017.
  11. ^ Klein, Shaun M. (1996). "Piercing the Veil of the Limited Liability Company, from Sure Bet to Long Shot: Gallinger v. North Star Hospital Mutual Assurance, Ltd". Journal of Corporate Law. 22: 131. Retrieved 7 September 2017.
  12. ^ Vandervoort, Jeffrey K. (2004). "Piercing the Veil of Limited Liability Companies: The Need for a Better Standard". DePaul Business and Commercial Law Journal. 3: 51. Retrieved 7 September 2017.
  13. ^ Adkisson, Jay (30 April 2013). "The Misunderstood Charging Order". Forbes. Retrieved 7 September 2017.
  14. ^ See, e.g., "Delaware Code, Title 6, Chapter 18, Limited Liability Company Act". State of Delaware. Retrieved 7 September 2017.
  15. ^ "LLCs: Is the Future Here? A History and Prognosis". www.americanbar.org. October 2004. Retrieved 1 May 2018.
  16. ^ "Pros and Cons of a Limited Liability Company (LLC)". AllBusiness.com. Retrieved 7 September 2017.
  17. ^ Miller, Shari P. "Single Member LLC Vs. Sole Proprietorship Liability". Houston Chronicle. Hearst Newspapers, LLC. Retrieved 7 September 2017.
  18. ^ "Gatz Properties, LLC v. Auriga Capital Corp., 59 A. 3d 1206 (2012)". Google Scholar. Google. Retrieved 7 September 2017.
  19. ^ Falby, Bruce E. (22 August 2013). "Delaware amends its LLC Act: managers and controllers owe fiduciary duties unless LLC agreement provides otherwise". DLA Piper. Retrieved 7 September 2017.
  20. ^ Bainbridge, Stephen (27 September 2014). "Didn't sign your LLC operating agreement? Think that'll get you off? Think again". ProfessorBainbridge.com. Retrieved 7 September 2017.
  21. ^ "Instruction SS-4 (Rev. January 2011)" (PDF). Retrieved 4 January 2012.
  22. ^ "LLC Filing as a Corporation or Partnership". IRS. Internal Revenue Service. Retrieved 7 September 2017.
  23. ^ Akalp, Nellie (9 February 2012). "How to Structure Your Startup to Avoid Double Taxation". Mashable. Retrieved 7 September 2017.
  24. ^ "IRS Form 8832 (Rev. January 2011)" (PDF). Retrieved 7 September 2017.
  25. ^ "Tax Advantages of Corporations - Updated for Tax Year 2016". TurboTax. Retrieved 7 September 2017.
  26. ^ "Sturm v. Harb Development, 298 Conn. 124, 2 A.3d 859 (2010)". Google Scholar. Google. Retrieved 7 September 2017.
  27. ^ "Six Benefits of Limited Liability Companies". Cornerstone Law Firm. Cornerstone Law Firm, LLC. Retrieved 23 October 2017.
  28. ^ For example, HMRC in the United Kingdom, see HMRC Tax Manuals, DT19853A
B

B or b (pronounced BEE) is the second letter of the ISO basic Latin alphabet. It represents the voiced bilabial stop in many languages, including English. In some other languages, it is used to represent other bilabial consonants.

Division (business)

A division of a business, sometimes called a business sector or business unit (segment), is one of the parts into which a business, organization or company is divided. The divisions are distinct parts of that business. If these divisions are all part of the same company, then that company is legally responsible for all of the obligations and debts of the divisions. However, in a large organization, various parts of the business may be run by different subsidiaries, and a business division may include one or many subsidiaries. Each subsidiary is a separate legal entity owned by the primary business or by another subsidiary in the hierarchy. Often a division operates under a separate name and is the equivalent of a corporation or limited liability company obtaining a fictitious name or "doing business as" certificate and operating a business under that fictitious name. Companies often set up business units to operate in divisions prior to the legal formation of subsidiaries.

Generally, only an "entity", e.g. a corporation, public limited company (plc) or limited liability company, etc. would have a "division"; an individual operating in this manner would simply be "operating under a fictitious name".

Gesellschaft mit beschränkter Haftung

A Gesellschaft mit beschränkter Haftung ([gəˈzɛlʃaft mɪt bəˈʃʁɛŋktɐ ˈhaftʊŋ], abbreviated GmbH [geː ʔɛm beː haː] and also GesmbH in Austria) is a type of legal entity very common in Germany, Austria, Switzerland (where it is equivalent to a société à responsabilité limitée) and Liechtenstein. It is an entity broadly equivalent with the private limited company in the United Kingdom and many Commonwealth countries, and the limited liability company (LLC) in the United States. The name of the GmbH form emphasizes the fact that the owners (Gesellschafter, also known as members) of the entity are not personally liable or credible for the company's debts. GmbHs are considered legal persons under German, Swiss and Austrian law. Other variations include mbH (used when the term Gesellschaft is part of the company name itself), and gGmbH (gemeinnützige GmbH) for non-profit companies.

The GmbH has become the most common corporation form in Germany, since the AG (Aktiengesellschaft), the other major company form corresponding to a stock corporation, was much more complicated to form and operate until recently.

List of legal entity types by country

A business entity is an entity that is formed and administered as per corporate law in order to engage in business activities, charitable work, or other activities allowable. Most often, business entities are formed to sell a product or a service. There are many types of business entities defined in the legal systems of various countries. These include corporations, cooperatives, partnerships, sole traders, limited liability companies and other specifically permitted and labelled types of entities. The specific rules vary by country and by state or province. Some of these types are listed below, by country. For guidance, approximate equivalents in the company law of English-speaking countries are given in most cases, for example:

Ltd. (UK, Ireland and the Commonwealth)

public limited company (UK, Ireland and the Commonwealth)

limited partnership

unlimited partnership

chartered company

statutory company

holding company

subsidiary company

one man company (sole proprietorship)

charitable incorporated organisation (UK)

non-governmental organizationHowever, the regulations governing particular types of entities, even those described as roughly equivalent, differ from jurisdiction to jurisdiction. When creating or restructuring a business, the legal responsibilities will depend on the type of business entity chosen.

Low-profit limited liability company

A low-profit limited liability company (L3C) is a legal form of business entity in the United States that was created to bridge the gap between non-profit and for-profit investing by providing a structure that facilitates investments in socially beneficial, for-profit ventures by simplifying compliance with Internal Revenue Service rules for program-related investments, a type of investment that private foundations are allowed to make.

Private limited company

A private limited company is a type of business entity in "private" ownership used in many jurisdictions in contrast to "public" ownership, with some differences from country to country. Examples include LLC in the US, private company limited by shares in the UK, GmbH in Germany or společnost s ručením omezeným in the Czech Republic.

Public limited company

A public company (legally abbreviated to PLC) is a type of public company under United Kingdom company law, some Commonwealth jurisdictions, and the Republic of Ireland. It is a limited liability company whose shares may be freely sold and traded to the public (although a PLC may also be privately held, often by another PLC), with a minimum share capital of £50,000 and usually with the letters PLC after its name. Similar companies in the United States are called publicly traded companies. Public limited companies will also have a separate legal identity.

A PLC can be either an unlisted or listed company on the stock exchanges. In the United Kingdom, a public limited company usually must include the words "public limited company" or the abbreviation "PLC" or "plc" at the end and as part of the legal company name. Welsh companies may instead choose to end their names with ccc, an abbreviation for cwmni cyfyngedig cyhoeddus. However, some public limited companies (mostly nationalised concerns) incorporated under special legislation are exempted from bearing any of the identifying suffixes.

The term "public limited company" and the "PLC"/"plc" suffix were introduced in 1981; prior to this, all limited companies bore the suffix "Limited" ("Ltd."), which is still used by private limited companies.

Series LLC

A series limited liability company, commonly known as a series LLC and sometimes abbreviated as SLLC, is a form of a limited liability company that provides liability protection across multiple "series" each of which is theoretically protected from liabilities arising from the other series. In overall structure, the series LLC has been described as a master LLC that has separate divisions, which is similar to an S corporation with Q-subs.

The utility of a Series LLC may be explained by a comparison to the alternative. Many form an LLC in order to protect personal assets from a legal claim relating to their real estate investment or business liabilities. Additional liability protection may be gained by properly forming and maintaining a separate LLC to hold each property or business entity. By forming a separate LLC to own and hold each legally titled separate property or business entity, theoretically only the assets owned by a specific LLC would be subject to claims or lawsuits arising against that LLC. However, there are costs and administrative burdens associated with properly forming, qualifying and maintaining each separate LLC. Another option may be to form multiple series or "cells" if permitted under applicable laws. Although each cell of a Series LLC can own distinct assets, incur separate liabilities, and have different managers and members, a Series LLC may be able to pay a single set of annual state fees and may be able to file one income tax return each year. In addition to the administrative streamlining, the key value is that liability incurred by one unit does not cross over and jeopardize assets titled in or allocated to other subsidiary units of the same Series LLC.In several jurisdictions, the procedure for adding and deleting series is uncomplicated. Additional series can be formed or dissolved without any public filing by simply amending the Series' "limited liability company agreement" (equivalent to an operating agreement for other LLCs). Under Delaware law, any particular series may be dissolved by 2/3 approval of the ownership interests, or a simple majority if provided for in the operating agreement. Some jurisdictions, notably Illinois, do have a mechanism for public publication of series. Additionally Illinois states that each series is a separate entity, whereas Delaware is silent on whether each series is a separate entity. Most states with the series LLC have followed the Delaware model, rather than the model in Illinois which requires each series to be designated with the Secretary of State.

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