The Limited Liability
Company or LLC as it is most commonly known has become one of the
most popular business structures utilized by business owners today.
The Limited Liability Company blends the most advantageous characteristics
of a corporation and a partnership. As opposed to being comprised
of stockholders or partners, the participants are called members.
Just like a corporation
or a partnership, a Limited Liability Company is a separate legal
entity, but it is treated as a partnership for tax purposes and therefore
carries with it the "flow through" or "transparent"
tax benefits that corporations do not have. LLC's are very flexible
and as simple to run as a sole proprietorship. There is no statutory
necessity to keep minutes, hold meetings or make resolutions which
can create difficulties for corporation owners.
LLC's can also
be the perfect vehicle for the venture capitalist or for those seeking
to raise capital for a real estate project. Admitting new members
is a very simple process and there are no limits to the number and
or character of additional investors. They can include all types of
individuals, corporations, trusts, pension plans, foreigners (both
out of state and out of the country). This is virtually impossible
to do with a standard corporation.
The Limited Liability
Company has existed for many years but its popularity has grown tremendously
in the past decade. The first LLC legislation in the United States
was the Limited Liability Company Act of Wyoming in 1977. At that
time the Internal
Revenue Service
did not provide LLC members with partnership tax classification if
the members were exempted from personal liability for the company
debts.
In 1988 the IRS
reversed its position on this matter and all 50 states enacted LLC
laws. It was then that the popularity of Limited Liability Companies
gained momentum and began widespread proliferation amongst business
owners seeking maximum tax benefits with minimal operational nuisances.
Currently, state statutes vary, but work is in progress to create
and implement a uniform LLC law that will streamline formation nationwide.
The founding
premise of the Limited Liability Company is referred to as "freedom
to contract." Simply stated, freedom to contract means that the
members of the LLC are free to agree amongst themselves how the company
is to be run and that the agreement or contract they agree upon, known
as an Operating Agreement, will be upheld in the courts.
In addition,
no member of the LLC is personally liable for the LLC's debts or losses,
hence the term "Limited Liability." Profits and the relevant
taxes are passed through directly to the members so the LLC pays no
tax itself, unlike a standard corporation. An LLC qualifies for partnership
tax status and is much more flexible, providing numerous tax advantages
to its members. Invariably, tax-conscious entrepreneurs choose the
LLC as their preferred method of business due to the fact that it
is the perfect "pass through" entity.
Entrepreneurs
entering the business arena must clearly understand the fact that
we exist in a litigious society. Lawsuits arise unexpectedly from
seemingly minor conflicts and savvy business owners understand that
it is typically more cost effective to prevent a problem than to fix
one. Business owners who find themselves on the receiving end of a
lawsuit experience stress, aggravation, and worst of all, the unforeseen
expense of launching a legal defense. Whether the lawsuit has merit
or not, the dynamics are usually the same; defending a legal action
is extremely stressful and debilitating and distracts business owners
from concentrating on running their own business, further compounding
the negative impact of the lawsuit itself.
The Limited Liability
Company acts as a legal barrier between the LLC members and the plaintiffs.
A Limited Liability Company is a completely separate entity and none
of its members are personally liable for the LLC's debts whether they
arise in contract or tort.
Business is challenging
enough without unnecessary red tape. Corporations, especially S corporations,
are replete with regulations and requirements that can negate the
benefits of the entity itself when all things are held in comparison.
Limited Liability
Corporations were designed to provide entrepreneurs with a safe, simple
and effective way to operate their businesses, incorporating flexibility
with efficiency. Unlike corporations, there are no minutes to keep,
no necessity to hold time-consuming meetings, or requirements to make
additional resolutions in order to stay legal. In addition, a corporation
is the first target an aggressive attorney or the IRS will attack
in order to "pierce the corporate veil" to get at the stockholders
and corporate officers personally. If the records are not perfectly
maintained, corporate protection is sacrificed. The tax and legal
consequences can be disastrous.
LLC statutes
do not have the same technical requirements so members can retain
their liability protection without being concerned with inadvertent
non-compliance with a myriad of highly technical regulations and procedures.
The Operating Agreement can, for the most part, contain any procedures
and rules that are agreed upon by the relevant parties. Once put into
place the Limited
Liability Company
is basically maintenance free.
The Limited Liability Company is becoming the entity of choice for
a variety of businesses in every realm and its usage will continue
to gain momentum as more and more people learn of its practicality
and numerous benefits.
The
Most Critical Element; The Operating Agreement
The most
important part of the process is the drafting of the Operating Agreement
because it must comply with state and IRS regulations so that the LLC
will be taxed as a partnership and not as a corporation. Specific caveats
must be included in order to make the LLC a bona fide entity that cannot
be disputed at a later date.
It is essential
for business owners to select legal counsel that not only understands
entity formation but moreso, understands business as a whole. All
the legal expertise in the world is useless if it cannot be practically
applied to the specific needs of the entrepreneur. Since each business
is different so are their needs. At Legal & Compliance, LLC we
take thorough measures to understand the business needs of our clients
in order to bring them the most appropriate structures, professional
guidance and overall legal counsel.
Our attorneys
not only work directly with our clients, but with their investors,
accountants and other key personnel as well. In this way we keep the
lines of communication open, creating speedy and accurate solutions
to the inevitable obstacles that must be overcome in any business
scenario.
The most advisable
course of action is to contact us at the onset of your business. In
this way we may be able to save you precious time and dollars by putting
you and your business on the most advantageous path early on.
