The Limited Liability Company
The New Entity to Replace Corporations?
A Limited Liability Company (LLC) is a new kind of entity. It has some of the characteristics of a corporation and some of a partnership. First, it is taxed like a partnership (although it can choose to be taxed like a corporation). That is, like a partnership the income and the deductions flow through to the individual partners who pay their proportionate share of tax. No federal tax is paid at the company level. The taxation is like a
S Corporation. However, unlike a S corporation, it can have an unlimited number of shareholders or "members" as they are known in an LLC. Also, there are no restrictions on who is a shareholder as there is with a S corporation.
As with anything there are advantages and disadvantages. As was mentioned above, an LLC can choose to be taxed as a regular corporation. The way an LLC chooses is by retaining three or more of the corporate characteristics. These characteristics are:
- Limited liability
- Free transferability
- Continuity
- Centralized management.
This means in order to be taxed as a partnership at least two of the corporate characteristics must be eliminated. No one wants the limited liability eliminated, which means you must decide to throw away at least one of the remaining three. It is sometimes very hard to decide which one you want to discard.
Another disadvantage is the potential for problems if your company does business outside of its state border. The LLC is a relatively new entity. California only in 1994 enacted LLC legislation. Right now about 47 states in the U.S. have LLC's. The problem is each state has a different laws governing LLC's. In other words, you could have a problem in state X and Y and each state will give you a different result legally for the resolution of your problem. So far, there are no uniform statutes as there are in the partnership law or in the Uniform Commercial Code (UCC). Corporations have been around for over one-hundred years thus there are lots of court cases interpreting the various laws for attorneys to look to when encountering a problem. With LLC's there are very few cases interpreting the new LLC laws.
Disclaimer: The information in these web pages has been prepared as a
service to the community and does not constitute legal advice. This
information may not apply to your situation particularly if you do
not live in the state of California. Do not make legal decisions based
on this material. Consult an attorney in person before making any
important legal decision.
