The limited liability company is a hybrid type of business structure. It contains elements of both a traditional partnership and a corporation. The limited liability company form of business structure is relatively new. Only in the last few years has it become available as a form of business in all 50 states and Washington D.C. Its uniqueness is that it offers the limited personal liability of a corporation and the tax benefits of a partnership. A limited liability company consists of one or more members/owners who actively manage the business of the limited liability company. There may also be nonmember managers employed to handle the business.

Disadvantages

In as much as the business form is still similar to a partnership in operation, there is still a potential for conflict among the members/owners of a limited liability company. Limited liability companies are formed according to individual state law, generally by filing formal Articles of Organization of a Limited Liability Company with the proper state authorities in the state of formation. Limited liability companies are, generally, a more complex form of business operation than either the sole proprietorship or the standard partnership. They are subject to more paperwork requirements than a simple partnership but somewhat less than a corporation. Limited liability companies are also subject to far more state regulations regarding both their formation and their operation than either a sole proprietorship or a partnership. In all states, they are also required to pay fees for beginning the company, and in some states, annual franchise fees of often hundreds of dollars are assessed for the right to operate as a limited liability company.

Similar to traditional partnerships, the limited liability company has an inherent lack of continuity. In recent years, however, an increasing number of states have allowed limited liability companies to exist for a perpetual duration, as may corporations. Even if the duration of a limited liability company is perpetual, however, there may be difficulties if the sole member of a one-member limited liability company becomes disabled or dies. These problems can be overcome to some extent by providing, in the Articles of Organization of the limited liability company, for an immediate reorganization of the limited liability company with the deceased member’s heirs or estate becoming members of the company. In addition, similar to partnerships, it may be difficult to sell or transfer ownership interests in a limited liability company.

Advantages

The members/owners in such a business enjoy a limited liability, similar to that of a shareholder in a corporation. In general, their risk is limited to the amount of their investment in the limited liability company. Since none of the members will have personal liability and may not necessarily be required to personally perform any tasks of management, it is easier to attract investors to the limited liability company form of business than to a traditional partnership. The members will share in the potential profits and in the tax deductions of the limited liability company, but in fewer of the financial risks involved. Since the limited liability company is generally taxed as a partnership, the profits and losses of the company pass directly to each member and are taxed only at the individual level.

A further advantage of this type of business structure is that it offers a relatively flexible management structure. The company may be managed either by members (owners) themselves or by managers who may or may not be members. Thus, depending on needs or desires, the limited liability company can be a hands-on, owner-managed company or a relatively hands-off operation for its members/owners where hired managers actually operate the company.

A final advantage is that limited liability companies are allowed more flexibility than corporations in how profits and losses are actually allocated to the members/owners. Thus, one member/owner may be allocated 50 percent of the profits (or losses) even though that member/owner only contributed 10 percent of the capital to start the company.

"Choosing a Business Entity" © Nova Publishing Company, 2005

For many people, the question of incorporating is one of the first questions they deal with in a new business. How should they incorporate? What type of company should they be in the eyes of the state? What does this mean for their taxes, their structure, and their overall future? For others, these questions are long-since settled: setting up organizations like Limited Liability Corporations (LLCs) is just another part of doing business in today’s environment. But if you want to get from A to B and understand what exactly an LLC requires, where do you start?

Well, right here. Because in this article, we’re going to talk all about the legal forms that you need to not only start, but run an LLC so that everything is clear, legal, and ready for tax season. Let’s get started.

Starting an LLC

One of the most important things you can ever do in your life is start a business, because depending on how that business grows, its finances can affect not only your future, but dramatically have a reach on just about every other area of your life. If you have a business that takes up all your time, it can put a strain on relationships and even your health. But if you have a business that is booming and plenty of free time as the business manager, then suddenly things don’t seem so bad.

With that in mind, starting an LLC is also an important decision to make, which is why you’ll want to pay close attention to the articles of organization, or the initial filing papers, that essentially tells the state what your LLC is going to be called. When you file these papers, you’re also committing yourself to a certain tax structure and a certain organizational structure that will have to remain in place for the entire duration this business is an LLC.

If you have other people in your LLC, you’ll also want to start out with an “operating agreement,” or what is essentially a contract between all of you defining each person’s role within the LLC.

Running an LLC

Running an LLC will mean that you have to encounter many of the various tax forms that any business would have to encounter - filing the right paperwork to hire people, file taxes, and generally run business as any other company would. But if you want to define specific forms relating to an LLC, it’s important that we do so now.

Many of these issues relate to tax forms, and the good news about LLCs is that there’s a great amount of flexibility in the way you file taxes. For example, if you are a sole proprietor LLC, you can file taxes essentially as a sole proprietor, even if you have to report that your income goes to your LLC. These tax forms will not be very different from the tax forms you currently file now if you’re already a sole proprietorship.