Limited Liability Corporation (LLC)
What is an LLC or Limited Liability Company?
A limited liability company, or LLC, may be formed by one or more owners, called members. It provides members with limited liability protection for their personal assets in most cases, just as a corporation does for its shareholders. It also offers the members with “pass-through” taxation like a sole proprietorship or partnership, avoiding the potential of double taxation in a C Corporation.
How to Form an LLC
Like a corporation, an LLC is formed at the state level by filing Articles of Organization with the Secretary of State. For a single member LLC, this is essentially all that is required to begin operating a business as an LLC. If the LLC has two or more members, they will need to enter into an operating agreement, similar to a partnership agreement, which should be in writing. This often requires the expertise of an attorney to be properly prepared, and adds to the cost of forming an LLC.
Owners and Management in an LLC
An LLC may have an unlimited number of owners and there are no restrictions on the type of persons who may be owners. One of the main advantages of an LLC over a corporation is the greater flexibility in the management of the business. An LLC may be managed in the following ways:
solely by its members;
by one or more managers;
by its members and officers.
Though an LLC and an S Corporation are both “pass-through” tax entities, an LLC is not subject to the requirements that must be met in order to be an S corporation. There are no restrictions on the type of persons who may be members in an LLC. The LLC may have an unlimited number of members, and the LLC may have more than one class of equity interest. Further, an LLC, unlike an S Corporation, may provide for allocations of profits, losses, and distributions disproportionate to the percentage of equity interest held in the LLC.
Disadvantages of an LLC
Compared to a corporation, an LLC is a less favorable entity choice as far as raising capital from outside investors or offering ownership interests to employees. The corporation structure has been in existence far longer than the LLC and is better understood with respect to its structure and how ownership interests are represented in stock certificates. These characteristics have less certainty and may be more difficult to comprehend in an LLC because of the potential complexity of an LLC operating agreement.