I was pleased to review the advice one of my employees gave one of our clients on the creation of a LLC type of business for taxation purpose over other forms of businesses. I agree with all of the advice he offered the clients, though I want to add a little bit on the information he availed to them on LLC’s. My advice will still be based on the follow up interviews my firm had with them, and I want to make sure that they understand completely of what constitutes of LLC businesses.
As business owners, I am sure they were faced with numerous critical decisions, including what types of business structures were open to them and their business. While there are numerous structures allowed in the country of partnership, sole- proprietorship or corporation for ownership of businesses, the most appropriate structure for their company was found to be a limited liability company. I want to clarify further on what this is.
A limited liability company, or a LLC, is a type of business ownership that combines a number of features of structures or corporation and partnership. It is, therefore, not a partnership or a corporation. It might be referred to as a limited liability corporation. Members in such partnerships are referred to as shareholders or partners. In this case, the number of members is unlimited and might be corporations, individuals or other LLCs, therefore, with time if they want they can incorporate such members(Keatinge et al., 1992).
This form or structure of companies has numerous advantages. For instance, owners of a LLC posses the liability protection of corporations. A LLC occurs as an entity, which is separate just like a corporation. Therefore, members of such a company cannot be held responsible for company debts unless they have agreed to in a written agreement. Another advantage is that it imposes on the company a flexible manner of sharing profits. These companies can select different kinds of distribution of gains. Unless other forms of companies that only allow half- half-splitting of profits, these companies allow a more flexible distribution of profits(Keatinge et al., 1992).
While numerous corporations are required to keep minutes that are formal, record resolutions and hold formal meeting, the LLC structure does not, and, therefore, it is easier to run. It also allows all the losses, expenses and profits of the company to flow through the company to individual company members. Generally, this imposes on the company a tax advantage because it makes it possible to avoid double taxation(LLC history).
I also want to bring to the attention of the clients some of the crucial limitations associated with LLCs, which to me are insignificant to their business when compared to the number of advantages they will obtain from this business structure. One of the essential limitations of a LLC is that it has a shorter life when compared to corporations. Another limitation is that it limits the owners from making the business public(Ribstein,1995).
For the purposes of tax, I want to advise them further on how they will be treated by the IRS. A LLC like theirs with multiple owners is not required by LLC tax law to file federal tax returns. This is because each member is supposed to pay taxes according to their share of profits from the company. The initial company agreement they will draw, therefore, will set forth the distribution share each member will get, and their shares and loses will be distributed accordingly(Ribstein,1995).
I hope that this will be of more use to the clients as they decide on which structure of company they will file for. You are welcome anytime to our offices for more information if you so wish.
Keatinge et al.(1992).The Limited Liability Company: A Study of the Emerging Entity. Business Lawyer 375: 383-384.
LLC history. Historical Background of the Limited Liability Company. Retrieved from http://www.llc-reporter.com/16.htm
Ribstein, L. E.(1995). A Critique of the Uniform Limited Liability Company Act. Stetson Law Review 312: 322 28.
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