LIMITED LIABILITY COMPANY BENEFITS
By: William H. Copperthwaite Jr., EsquireA Reprint from Daily Local News:
There are different types of business formations: C Corporations, S Corporations, Partnerships, sole proprietorships and Limited Liability Companies (LLC).
The issue in deciding on the type in business form is to have the most advantageous tax treatment and limited liability for the business owners. The Limited Liability Company (LLC) will provide for tax pass-through treatment while shielding its owners from personal liability.
The LLC provides for a variety of non-tax business advantages, including flexible management choices, flexible capital structure, liberal member qualification requirements, and limited liability for its members. The LLC can be used in the many types of businesses: venture capital, real estate, start-up enterprises, professional service firms, estate planning and family businesses.
The first Limited Liability Company statute was enacted by Wyoming in 1977. In 1988, the Internal Revenue Service (IRS) classified a Wyoming Limited Liability Company as a partnership for federal income tax purposes. Since that time, Limited Liability Companies have become one of the most beneficial business entities.
The LLC is governed by state law, so each state could have a different law governing the LLC. State law would govern on whether the LLC may be formed by one individual (or require at least two parties). Pennsylvania law allows a "single-member LLC" to be formed by one individual owner (the owner of an LLC interest is called a “member”).
In Pennsylvania, the Limited Liability Company is formed by filing a certification of organization with the Secretary of State. The organization's name must contain the phrase "Limited Liability Company" or "LLC". The certification of organization must also contain the name of the LLC, place of business or registered office in the state, whether the business will be managed by its members or managers, and the duration of the company's existence (which may be perpetual).
In addition to the certification of organization, the LLC members should execute an Operating Agreement which would be the contractual agreement among the members. The Operating Agreement states the business purpose of the company, members’ initial capital contribution, distribution of profits and loss, management procedure, method of admitting new members, procedure for a member to withdraw, method of continuation when a member withdrawals, maintenance of the company’s books & records, and other desired provisions.
There is no limit on the number of members (compared to a maximum of 100 shareholders for an S Corporation) and an LLC may have different types of members (as opposed to an S Corporation which generally only allows for U.S. resident individuals as shareholders). An additional advantage of an LLC over an S Corporation includes the ability of an LLC to make disproportionate distribution among the members (whereas the S Corporation requires each shareholder must receive a distribution in the same percentage as the shareholder percentage).
IRS regulations provide the method to determine the tax treatment of the LLC. Generally, partnership taxation is available to an LLC under the "check-the-box" regulations, which allows for the selection of tax treatment by checking off a bon on a tax filing form. Provided the entity is not required to be taxed as a corporation, an LLC may choose to be taxed as a partnership (which would provide for pass-through taxation of the profits to the individual owners). [IRS regulations require some business organizations to be classified as a corporation (joint-stock companies, insurance companies, organizations that conduct certain banking activities, organizations wholly owned by a state, organizations that are taxable as corporations under a specific provision of the Internal Revenue Code and certain organizations formed under the laws of a foreign jurisdiction, including a U.S. possession, territory, or commonwealth).]
An LLC with two or more members may be classified as a partnership. A single-member LLC can choose to be taxed as a corporation or can be disregarded as an entity separate from its owners thus allowing the profits & losses to be reported directly on the individual tax return (this is called a "disregarded entity").
While the Limited Liability Company is provided pass-through treatment for federal taxation, each state may tax the LLC differently for state income tax purposes. Some states may tax the LLC as a partnership, while other states, such as Pennsylvania, will treat the LLC as a corporation (for capital stock tax purposes). Using Pennsylvania, for instance, the treatment of Limited Liability Companies as corporations in Pennsylvania for purposes of taxation applies both to Pennsylvania Limited Liability Companies and non-Pennsylvania Limited Liability Companies operating in Pennsylvania.
In summary, the LLC is beneficial because it can be custom tailored to the needs of a small business and large business. The LLC will continue to grow in popularity as the entity of choice for the future.
William H. Copperthwaite Jr., Esquire is a West Chester lawyer concentrating in business formation, taxation, trusts & estates, and real estate. The firm’s phone number is 610-429-3800 and website is www.whc-law.com.
Reprint from Daily Local News, November 23, 2008
Please note that the information contained in this summary is intended for informational purposes only and is not to be considered tax/legal advice. For specific advice, please contact the Law Offices of William H. Copperthwaite Jr., L.L.C.
