THE BASICS:
WHAT IS IT? WHO NEEDS IT? WHY SHOULD I CARE?
What is It? An LLC is a blend of some of the best characteristics of corporations, partnerships and sole proprietorships. It is a separate legal entity like a corporation but it is entitled to be treated as a partnership for tax purposes and therefore carries with it the "flow through" or "transparent" tax benefits that corporations do not have. It is very flexible and simple to run and, like a sole proprietorship, there is no statutory necessity to keep minutes, hold meetings or make resolutions which can trip up many corporation owners. The LLC is a relatively new entity for the United States. They have existed for many years abroad and actually, the first LLC legislation in the United States was the Limited Liability Company Act of Wyoming in 1977. They didn't catch on right away because the IRS wouldn't give an LLC partnership tax classification as long as the members were exempted from personal liability for the company debts. It wasn't until 1988 that the position changed and since then all 50 states have enacted LLC laws. State statutes do vary and work is currently in progress on a uniform LLC law that will streamline formation in the nation. The LLC is based upon a very important and guarded principle in America called the freedom to contract. Basically this means that the members are free to agree among themselves how the company is to be run and that agreement or contract will be upheld in the courts. When you combine that principle with the fact that no member is personally liable for the company debts and profits and/or losses are passed directly through (i.e. the LLC pays no tax itself) to the members you have the "super pass through entity" as it is being called. The limited liability company is becoming the entity of choice for business in every realm and will continue to gain momentum as more and more people learn of its existence.
The limited liability company (LLC) is a completely new form of doing business. It is NOT a corporation. It is NOT a partnership It is NOT a sole proprietorship. You do not call the owners stockholders or partners. You call them MEMBERS. You do not call the business a limited liability corporation (as many do). It is a limited liability company.
Who Needs It?
Anyone who begins a new business venture should be concerned with certain basic truths. One sad but true fact is that the society is becoming more and more litigious every day and more and more unfortunate souls are finding themselves on the wrong side of law suits. Right or wrong the experience of defending a legal action is extremely stressful and debilitating. In my 30 plus years of practicing I have never found a person yet who relished being sued. So, with the preaching over with, the point is simple. If you can put a legal shield between you and creditors you should do it. The LLC is a completely separate entity. None of its members are personally liable for its debts whether they arise in contract or tort.
Another pretty obvious truth is that the government continues to take more and more from us in the form of taxes and that trend is not declining. The taxpayer has to be creative and take advantage of every possible break. The LLC does not pay any tax itself (which is not the case with corporations) and it qualifies for partnership tax status. The partnership tax rules are more flexible and give the tax planner a definite advantage over other forms of doing business. Anyone concerned with tax liability should consider doing business as a limited liability company.
And a final universal truth is that no one needs any more red tape in their life. Corporations, and especially S corporations, are riddled with rules and regulations that can seriously jeopardize the benefits that the corporate form is intended to provide. The LLC was designed with simplicity and flexibility as its hallmarks. There is no need to keep exhaustive minutes, hold meetings, or make resolutions to, in effect, stay legal. This is a huge trap for the unwary and is the first place the IRS or an aggressive attorney will attack to "pierce the corporate veil" and go after the stockholders personally. If the records are not maintained perfectly the corporate protection is lost. The tax and legal consequences can be disastrous. The LLC statutes do not require any of this red tape for the members to keep their liability protection. The operating agreement can, for the most part, contain any procedures and rules that the parties desire and once put in place can just sit there maintenance free. The initial drafting of the operating agreement is very important because it must comply with state regulations so that the LLC will be treated as a partnership and not as a corporation.
Need to raise money for a real estate or venture capital project? The LLC is a perfect vehicle. Admitting new members is a simple process and there are no limits as 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 certainly not the case with the corporate structure, especially the subchapter S corporation.
You obviously do care if you have read this far. If you are in the formation stage of a new business now is the perfect time to set it up correctly. Let's face it; once you get involved in actually operating a new concern there is no time to do anything else if you expect to be successful. If you ask most of your friends that have corporations if their minutes and resolutions are up to date and if they are actually holding their yearly meetings as required the answer is uniformly going to be "are you kidding, I barely have time to ...!." They are sitting ducks for law suits and IRS audits that will brush aside that corporation as if it never existed. Human nature is what it is and, unfortunately, procrastination is part of it.
The business owner today has to avail himself of the protections that the law provides. Not to do so does not make common sense nor does it set him up for success. Whatever decision is made as to the form of business that is selected, whether it be a partnership, corporation, LLC or sole proprietorship it needs to be thought out and put in place at the outset. The limited liability company does have the benefit of simplicity of operation and was designed with the small business owner in mind. Once in place it does not need ongoing high maintenance and can be modified extremely easily to reflect changed circumstances or objectives. The bottom line is that none of this is going to help after the fact. The most recent example I can relate is the travel agency owner that called and wanted to know how fast she could form an LLC to protect her personal assets from lawsuits. A dispute over a $65.00 ticket had mushroomed in to a $2500.00 claim. I couldn't help her. The law suit had been filed already and both she and her travel agency were named in the suit. If an LLC had been in place she would not have been a proper defendant and could not have even been named. Have I made the point? You should care.