Limited Liability Companies
Many entrepreneurs find both corporate and partnership forms attractive for different reasons. Forming a corporation limits personal liability for business debts and losses, while using a partnership form provides substantial tax advantages. Limited liability company laws combine these two advantages into one business form, simplifying the choice for many businesspeople.
Limited liability companies take their tax treatment from partnership forms. Unlike corporations, partnership and limited liability company profits and losses pass through to the individual owners. Instead of taxing limited liability companies at a higher corporate rate, the business income is imputed directly to the owners and is taxed at their individual income tax rate. Therefore, gains are taxed only once, instead of the double taxation imposed on some corporate earnings.
Example: Gene and Bill open a limited liability company, G&B Industries, LLC. In the first year, the company's profits are $20,000. Gene and Bill each take $10,000 out of the business, which is taxed as part of their individual incomes rather than as income for G&B Industries.
While limited liability companies allow their owners to benefit from lower tax rates, they also insulate owners from many legal risks. As with corporations, the limited liability company retains liability for business debts and obligations. Unless they assume certain roles or behave contrary to shareholder and public interests, the business owners do not take on personal responsibility for organizational liabilities.
Example: G&B Industries breaches a contract with a supplier, who files a lawsuit. G&B loses and the court orders the company to pay $100,000 in damages. G&B's assets are inadequate to satisfy the verdict, but the supplier cannot look to Gene and Bill to make up the deficiency. The supplier receives only that amount that the limited liability company is able to pay.
Because limited liability companies exist by virtue of state statutes, business owners must comply with all legal requirements in order to retain their limited liability status. Limited liability companies generally must have two or more shareholders at all times; corporations need no more than one shareholder. Limited liability companies must observe corporate formalities. They must maintain their corporate registration and file any documents or reports required by the state. Limited liability companies must hold shareholder and board meetings, keep corporate records, issue shares, and obey by-laws and articles of incorporation. If owners ignore corporate formalities, they could open themselves to personal liabilities or other negative legal consequences.
The tax and liability implications of limited liability companies are attractive, but competent legal advice should be sought in order to take full advantage of this business form.
This publication and the information included in it are not intended to serve as a substitute for consultation with an attorney. Specific legal issues, concerns and conditions always require the advice of appropriate legal professionals.