Limited Liability Company ‘LLC’
Information regarding Limited Liability Companies is provided in the following sub-sections:
DESCRIPTION
A Limited Liability Company is a form of business entity which combines the “limited liability” feature of the corporation with the tax advantages of the partnership.
Generally, most people form corporations or limited liability companies in order to shield the shareholders or members and officers or managers from personal liability for the debts and obligations of the entity. There may also be various tax advantages to forming these entities which may not be available for sole proprietorships and general partnerships
A limited liability company is taxed similarly to a Sub-S Corporation, because there is only single taxation. A basic difference is that, LLC structures offer a partnership tax return whereas a Sub-S Corporation must file a corporate tax return.
FEATURES
Unlike a Limited Partnership, a Limited Liability Company is not required to declare a general partner. The manager of a Limited Liability Company does not have to maintain a one percent interest in the entity; therefore the personal assets of the manager cannot be attached by a creditor seeking payment of a Limited Liability Company debt. Furthermore, no member of a Limited Liability Company may be held fully liable for any debts of the company.
LLC structures can allocate specifically any distribution of income, gain, deduction, or loss among its members. Stockholders of corporations organized under Subchapter S of the IRS guidelines are limited to distributing interest among its shareholders in proportion to holdings of capital. The entity may have any number of stockholders, unlike a sub S corporation that is restricted to a maximum of 35 investors. In addition, corporations, partnerships, certain kinds of trust, and non-resident alien individuals are restricted from being shareholders of a sub S corporation. LLC structures are not subject to these restrictions.
LLC operating costs are inherently lower those of a sub S corporation. Whereas a general partner may not be removed by members of the Limited Partnership, an LLC is not required to declare a general partner. Managers designated by members of an LLC may be subject to removal if desired.
CHOOSING TO IMPLEMENT A LIMITED LIABILITY COMPANY
The limited liability company is governed by the new provisions of chapter 86 of the Nevada Revised Statues. It is a new entity which provided added flexibility for business and tax planning. A limited liability company is taxed as a partnership under the Internal Revenue Code but provides limited liability to its owners and Manager (owners are referred to as "Members" in the statutes).
Both the revenue and expense of the limited liability company (LLC) flow through to the Members for tax purposes in the same fashion as revenue and expense of a Partnership flow through to partners. Given its true pass-through characteristics and limited liability for all involved, many consider an LLC as a good alternative to either the S-corporation or a limited partnership.
TYPICAL USES
Companies that are closely held entities and not to be traded publicly in the near term may benefit from organizing as LLC structures. Business activities which typically benefit from organizing as an LLC include:
- Real Estate Developers
- Corporate Joint Venture
- Subsidiaries of Sub-S Corporations
- Venture Capital Vehicle
- Small or Family Businesses
REAL ESTATE DEVELOPERS
Members may contract debt (acquire loans) on behalf of the LLC. Once the property is acquired, any income, gain, deduction, or loss may be specifically allocated among the Members. This combination of provisions essentially allows for the transfer of capital gains from one member to another. The obvious advantage is when allocating the capital gains from a domestic entity to a foreign entity, typically a Bahamas (IBC) Corporation. The domestic entity avoids the excise tax for a transfer of property to a foreign entity and the foreign entity is exempt from capital gains taxes!
CORPORATE JOINT VENTURE
Rather than using wholly owned subsidiaries to establish a general partnership joint venture, corporations may form an LLC that will provide the same amount of limited liability as well as pass-through taxation.
SUBSIDIARIES OF SUB-S CORPORATIONS
A sub S corporation may not own more than 80% of an LLC subsidiary corporation; however, a sub S corporation may form a wholly owned subsidiary LLC. Owning the subsidiary LLC would allow the parent S corporation to expand its resource base.
VENTURE CAPITAL VEHICLE
LLC structures allow considerable opportunities for investment of company capital into income-generating ventures since the potential number of investors are unlimited. Venture profitability can be enhanced further when members are structured as offshore corporations.
SMALL OR FAMILY BUSINESSES
LLC structures are ideal for small or family-operated businesses. There is total flexibility for structuring management and ownership, and members avoid double taxation.
TAX COMPLIANCE AND THE CORPORATE SHIELD
A business organized for purposes other than banking or insurance may find it advantageous to establish itself as a Limited Liability Company rather than as a corporation. A Limited Liability Company (LLC) is a combination of a corporation and a limited partnership. Members are granted the limited liability of corporate shareholders and the pass through tax advantages of a partnership without the restrictions imposed on limited partnerships and Subchapter-S corporations. The management and ownership may be structured in any fashion as specified in the LLCs Operating Agreement, enabling flexibility of income distribution. Additionally, the Operating Agreement is not required to be publicly filed, maintaining the privacy of ownership.
The principal issue when forming an LLC will be whether pass-through taxation is desirable; if not, the LLC can be structured to be taxed as a corporation. The LLC can be organized with two or more members. Members may be any person or legal entity, domestic or foreign, who own an interest in the company. Members have no liability (under California Corporations Code Section no. 1700, Chapter 86 of NRS in Nevada, and under WS 17-15-101 through 17-15-136 for Wyoming) for the debts, obligations or liabilities of the company to any third parties, whether any such debts, obligations or liabilities arise out of contract, tort or otherwise, solely by reason of being members of an LLC. An LLC requires no general partner, so all of the members have the same limited liability, regardless of ownership interest.
PRICING
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