Builders and Contractors Exchange
Weekly Bulletin: 21 Jun 2004
What Type Of Entity Is Right For Your Business? Part 4 of 4:
Limited Liability Companies ("LLC's")
By: Richard J. Crouch
This article is the final installment in a series of four articles that explore and compare the benefits and disadvantages of different types of business entities -- sole proprietorships, partnerships, corporations, and LLC's.
In the first three articles, we discussed sole proprietorships, general partnerships ("GP's"), limited partnerships, "C" corporations, and "S" corporations ("SC's"). In this article, we discuss LLC's, which can combine the best aspects of the entities discussed in this series.
Limited Liability Companies:
A. Formation and Flexibility: LLC's must be registered with the State Corporation Commission by filing Articles of Organization ("Articles"). LLC's are operated by the members, unless management is delegated to one or more "managers" as provided for in the LLC's Articles or operating agreement. All members of the LLC can take an active role in the operation of the business without exposing themselves to personal liability, which cannot be done in GP's. On the other hand, you can also limit or prevent other members' right to vote on management affairs, and have a single manager direct the LLC, if you prefer to retain control.
B. Personal Risk and Liability: LLC's, like corporations, protect members from the claims of the LLC's creditors by limiting liability for business debts to the value of the members' investment in the business (which still may be significant), and members cannot have their personal assets used to pay the LLC's debts.
C. Taxation and Compensation: You may choose to have your LLC taxed like a GP or SC, with a single level, flow-through taxation without having to meet the strict criteria and formalities imposed on SC's (but self-employment tax may still apply). Although it should be possible for a member-manager to have some of its income treated as non-self-employment income, to the extent it represents a return on its investment in the LLC, rather than the fair market value of its services, there is no authority as of yet to substantiate such a position. There is, however, an emerging trend that limited members who take a passive role in LLC's may treat their distributions as a return over capital contribution rather than a salary. Another benefit of the LLC is the flexibility in allocating profits and losses. There is no restriction on how to do this. You can compensate a member on any number of criteria, such as the overall profitability of the LLC, the profitability of a division, or the discretion of the manager or managing member. The value of this flexibility is that you can make someone a member and customize their compensation and incentives.
As mentioned in this series, choosing the right entity will depend on a number of factors. Being organized from the beginning can save you a lot of complications and money down the road. It is always a good idea to consult an attorney experienced in these matters, and the more specific your business plan and your preparation, the easier it will be for your lawyer to help you form the entity that is right for your business.
Questions?
If you have any questions about this article or any other related matters, please contact:
This article is meant to bring awareness to this topic and is not intended to be used as legal advice.