What is a limited liability company? It is an organizational structure for operating a business. A legal entity with separate and distinct ‘identity’ from its owners. They are created by state, or statutory law. LLCs have the same legal rights and responsibilities as individual persons.
Owners are shareholders, also known as members.
Different than Corporations
There are 4 main differences – income taxes, management, annual maintenance, and ownership.
LLCs themselves do not file a tax return. For federal and state income tax purposes, they are viewed as a ‘disregarded’ entity. There is no such thing as an ‘LLC’ tax return.
Profits and losses are ‘passed through’ (disregarded) to the shareholder and reported on their 1040 personal return. If there is more than one shareholder, a partnership information return 1065 is filed and K1s issued to each member. Their allocation of profits and losses is listed on schedule E of a 1040 personal tax return.
Optionally, LLCs may choose to be taxed as a corporation – either C or S classification.
The company is managed by a manager or by its members. You select either ‘manager managed’ or ‘member managed.’ Because it is a separate legal entity, an LLC can enter into contracts, own property, and be sued in its own name. They also offer limited liability protection for their shareholder members.
Members or the Manager can dissolve a limited liability company. When this happens, assets are either liquidated or distributed among its shareholders according to their ownership interests. A certificate of dissolution is normally filed with the Secretary of State.
Unlike corporations which must keep detailed records such as meeting minutes for officers, directors and stockholders, LLCs have a much lighter recordkeeping. This means their ‘corporate veil’ risk factor is lower. Yet they do file articles of organization with the Secretary of State and periodic updates.
Who can be a shareholder? Residents of any country, another LLC, a C corporation, a Partnership, an S corporation, a Living Trust, or a Business Trust.
Unlike a corporation, LLC members can have disproportionate shares relative to their financial contribution. For example, one member might contribute $500k and the other $100k but they are 50-50 shareholder owners.
LLCs are ideal for small investors or syndicates. For example, a small retail business or rental income property. Or for investors who contribute unequal amounts of capital relative to their member shares.
They are also useful for individuals that want S corporation tax benefits without the hassles of maintaining a formal S corporation.
Standard LLC Risks
- Business identity theft – is a problem that can have devastating consequences for companies of all sizes. Not only can it lead to financial losses, but it can also damage a company’s reputation and business relationships. This has resulted from Secretary of State fraud. It is a standard disclaimer on most Secretary of State Business Portal websites.
- Corporate veil – the potential for a court to strip away owners limited liability in the event of debt or liability lawsuit. This can happen if the company is found to have engaged in fraudulent or illegal activity, comingled personal and business assets, or unable to pay its debts. When the corporate veil is pierced, members can be held personally liable for its debts and liabilities. They might need to sell their personal assets to repay creditors.
- Filing Obligation – limited liability companies are required to file articles of organization with the secretary of state and submit periodic updates.
- Franchise Taxes – corporations in most every state are obligated to pay the annual franchise tax. If unpaid, taxes accrue until satisfied. Members of the company can be held personally liable.
- Online Visible – any registered LLC is easily found on the internet and Secretary of state’s website. Also called the SOS business search. All relevant filing details are disclosed.
How to Get the Benefits of the LLC Without the Hassles
LLCs do have many hassles. Here is a short list of them:
- Secretary of State Registration & Updates
- Resident Agents for Legal Service
- Statutory Recordkeeping for Veil Safety
- Franchise Taxes and Gross Receipts Tax
- Online Visibility of your Company Details
- Business Identity Theft
Fortunately, it is possible to get all of the benefits of a C Corporation without the hassles and risks. This is doable with a Business Trust Company, as it avoids all of the hassles and risks listed above and it’s private.
To learn more about the Business Trust Company GO HERE.