Like corporations, LLCs are business structures authorized by State laws. LLCs are also akin to corporations as the owners have limited liability to the debts and actions of the LLC, save for certain exceptions. Owners of LLCs are typically called members, and their ownership interest is often represented by “units”, similar to shares of stock of a corporation. The determination of the LLCs operations of LLCs are typically set forth in the operating agreement, which is like a partnership agreement to a partnership, and a shareholders’ agreement to a corporation. The members nominate the managers or managing board of the LLC, which is similar to a board of directors of a corporation, who in turn appoint officers. LLCs are typically taxed like partnerships, referred to as “pass-through entities” as the taxes due on the income from LLCs is reported on the members’ individual income tax return; the LLC itself typically does not pay taxes on its income or profits. An LLC can be owned by one person, a single-member LLC, or by an unlimited number of persons. There are certain restrictions on who can own an LLC; for example, banks and insurance companies cannot operate as an LLC. LLCs are often viewed as hybrid entities, a cross between a corporation and a partnership. LLCs have been more widely used since the Internal Revenue Code of the United States of America changed its laws related to taxation of LLCs in 1988 such that the owners of the LLC can choose to be taxed either a partnership for pass-through taxation purposes or like a standard corporation with double taxation. Before such changes, LLCs were subject to double taxation, making their use much less desirable. Now, with the current pass-through taxation benefits, yet operationally effectiveness of a corporation, coupled with the flexibility of partnerships as far as determining distributions of net incomes disproportionately among the members, LLCs have become widely used business entities in the United States.
Some of the benefits of an LLC as a business entity over the other business entities include:
-All of the owners of LLCS have limited liability exposure such that they are typically only liable for debts and obligations of the LLC up to their capital investment;
-LLCs offer pass-through taxation; -Sub-chapter S corporation have some restrictions, violation of which can cause an S corporation to be deemed a C corporation and be subject to double taxation; however, LLCs do not;
-I.R.S. “at-risk” limitations of corporations, and even some limited partnerships, typically are not applicable to LLCs;
-LLCs have broad structural and organizational options which give LLCs more simple operating efficiency and effectiveness;
State laws may result in State taxation of LLCs that are not uniform throughout the United States. For example, Florida does not require a general tax for LLCs, and there is no Florida State income tax. However, New York and Texas, for example, do have a State income tax structure applicable to LLCs that is in addition to any Federal income taxes.