What is a Limited Liability Company?
A limited liability company (LLC) is a form of business that blends elements of the limited partnership and corporate structures. The LLC can be a great tool for insulating unsafe assets and operating a business, while also maintaining some financial privacy. The LLC is a relatively new business entity. Wyoming was the first state to create LLC legislation in 1977. In 1982, Florida adopted an LLC act modeled after Wyoming’s LLC Act. Due to uncertainty over the tax treatment of LLCs, no other states introduced LLC legislation until after 1988. In 1988, the IRS issued a revenue ruling stating that it would treat a Wyoming-style LLC as a partnership for tax purposes. By 1996, nearly every state had enacted an LLC statute. While the LLC does not have as much case law and supporting history as the family limited partnership, it is now recognized in all fifty states with well-established case law and statutes.
Why was the LLC Created?
One reason the LLC was created was to limit liability of the owners and officers of the company as a result of the failure of corporations to do so. The corporation has what is called a corporate veil, originally designed to protect owners and officers in the corporation from losing personal assets for a claim against the business. Unfortunately, the corporate veil can be easily pierced and personal assets seized. For example, if the formalities of corporate minutes and meetings are not followed, owners and officers’ personal assets could be pursued and seized as a result of a claim against the business. Also, in a lawsuit against a corporation, most attorneys routinely name the owners and officers as defendants in the lawsuit, eliminating the protection of the corporate veil since the suit is also against them personally.
To solve these problems, the LLC laws specifically prohibit a lawsuit against the owners (called members) and managers of the LLC for a claim against the business. The LLC shields the owners and managers from personal liability for a lawsuit or debt of the business. It also shields the LLC from the personal debt and liability of the owners. The LLC law also states that this limited liability of the owners and managers is to be enforced, even if the company formalities of minutes and meetings are not followed. The LLC allows the owners to adopt flexible rules regarding the maintenance, administration, and operations of the company.
How does an LLC help with Taxes?
An LLC provides a great deal of flexibility in regards to taxation. An LLC can elect to be taxed as a sole proprietor, partnership, S corporation or C corporation. If the LLC has only a single member, the owner can elect to treat it for income tax purposes as a “disregarded entity.” As a disregarded entity, you do not have to file any tax returns for the LLC. The income and expenses are reported as a sole proprietorship on the personal return.
The name(s) of the owner(s) of the LLC are not required when filing the articles of organization, so the LLC allows some degree of anonymous ownership of business interest and property.
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