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A Limited Liability Company ("LLC") is a non-corporate business entity, in which all members have limited liability protection, in which all members can participate in management and control, and which, if appropriately structured, is taxed as a partnership rather than a corporation for federal income tax purposes. By combining limited personal liability with partnership tax classification, the LLC can provide advantages which are unavailable to corporations, partnerships or limited partnerships thereby affording investors the latitude to participate in business ventures.
Additionally, the LLC may be an appropriate vehicle for real estate investment, because it combines liability protection with favorable partnership tax treatment. Although real estate ownership creates potential liability under mortgages, leases and other contracts, environmental laws and other laws, real estate investors traditionally have avoided using corporations because they have considered taxation on in-kind contributions of real estate to be disadvantageous and because they have desired flow-through treatment of losses, enhanced by the increased basis provided through debt financing.
There are no major differences in the federal income tax treatment of LLCs and limited partnerships. The principal advantage of the LLC over the limited partnership is the limited liability protection afforded all LLC members and managers. Limited partnerships are required to have one or more general partners, who are personally liable for partnership debts and obligations. The LLC affords limited liability protection to its members regardless of the extent to which they participate in management and control of the LLC's business affairs. Although a similar result might be obtained by use of a limited partnership with a corporate general partner controlled by the limited partners, such a structure creates risk that the limited partnership will be classified as a corporation for federal income tax purposes.
Accordingly, a LLC, if appropriately structured to be classified as a partnership for federal income tax purposes, is permitted to allocate tax items of income, gains, losses, deductions, and credits among its members in accordance with its "partnership agreement" (i.e., operating agreement or regulations).
If the IRS continues to ease its positions concerning free transferability and continuity of life, and if states continue to adopt LLC statutes, these constraints will diminish or dissolve, and the LLC will become the entity of choice for more transactions.
A very effective and useful Asset Protection vehicle would entail the use of a LLC. The specific arrangement would depend on your particular circumstances, business activity, and the type of assets owned. If you are engaged in any business or if you own property, we recommend that you take necessary steps to arrange your affairs in order to maximize the income tax, estate planning and law suit protection techniques currently available.
If you would like to arrange a meeting to discuss these matters in more detail, please give us a call, and we would be happy to discuss the best plan to accomplish your objectives.
A corporation is a legal entity that is separate and distinct from its shareholder (owners). Under the law, corporations possess many of the same rights and responsibilities as individuals. They can enter contracts, loan and borrow money, sue and be sued, hire employees, own assets, and pay taxes. Some refer to a corporation as a "separate legal person."
An important element of a corporation is limited liability, which means that its shareholders are not personally responsible for the company's debts. A corporation may be created by an individual or a group of people with a shared goal. That does not always involve making a profit.
Almost all large businesses are corporations, including Google, United Airlines, Apple, Mercedes Benz, to new a few. Some corporations do business under their names and also under separate business names, such as Meta Inc., which famously does business as Facebook. The precise legal definition and it’s limited liability of a corporation differs from jurisdiction to jurisdiction, but the corporation's most important characteristic is always limited liability. This means that shareholders may take part in the profits through dividends and stock appreciation but are not personally liable for the company's debts.
A corporation is created when it is incorporated by a group of shareholders who share ownership of the corporation, represented by their holding of stock shares, and pursue a common goal. The vast majority of corporations have a goal of returning a profit for their shareholders. However, some corporations, such as charities or fraternal organizations, are nonprofit or not-for- profit. In any case, their shareholders, as owners of the corporation, do not accept responsibility for it beyond the potential loss of their investment in it. A private or "closed corporation" may have a single shareholder or several. Publicly-traded corporations have thousands of shareholders. In the U.S., corporations are created under the laws of the individual states and are regulated by state laws. Public corporations are regulated by federal law, primarily via the Securities and Exchange Commission.
Each state has its own laws regarding incorporation. Most states require the owners to file articles of incorporation with the state and then issue stock to the company's shareholders. The shareholders are required to elect the board of directors in an annual meeting. The process of turning a private corporation into a public corporation is far more complex, as it falls under federal laws requiring full and public disclosure of financial information to potential shareholders and to the government.
The shareholders of a corporation typically receive one vote per share. They hold an annual meeting during which they elect a board of directors. The board hires and oversees the senior management that is responsible for the corporation's day-to-day activities. The board of directors executes the corporation's business plan. Although the members of the board are not personally responsible for the corporation's debts, they owe a duty of care to the corporation and can incur personal liabilities if they neglect this duty. Some tax statutes also provide for the personal liabilities of the board of directors.
The legal existence of a corporation can be ended using the process called liquidation. This may be a voluntary decision to cease operations or may be forced by the financial collapse of the business. Essentially, a company appoints a liquidator who sells the corporation's assets. The company pays any creditors and distributes any remaining money to the shareholders. An involuntary liquidation is usually triggered by the creditors of a corporation that has failed to pay its bills. If the situation cannot be resolved, it is followed by a filing for bankruptcy.
Many—but not all—businesses are corporations, and vice versa. A business or any other enterprise may seek to incorporate. As a corporation, the enterprise exists as a legal entity separate from its owners. Most importantly, this means that the owners cannot be held responsible for the debts of the corporation. It also means that the corporation can own assets, sue or be sued, and borrow money.
To form a corporation in the U.S., it is necessary to file articles of incorporation with the state in which it will be registered. The details vary from state to state. Usually, incorporation is immediately followed by the issuance of stock to the corporation's shareholders. After this point, in an annual meeting, the shareholders will elect a board of directors.
Both a limited liability company (LLC) and a corporation offer similar legal advantages to their owners: they cannot be held liable for the debts of either entity. But LLCs have a tax advantage in that they are "pass-through," with profits and tax responsibility passed to the owners rather than paid by the LLC. LLCs are governed by an operating agreement that sets out the roles and responsibilities of its members, and establishing an LLC is relatively straightforward. By comparison, a corporation elects a board of directors, conducts annual meetings, and adopts bylaws. The process can be complex and lengthy, depending on the state in which it incorporates.