Business Entity

 

Limited Liability Company

LLC" for short,corporations and LLCs both limit the liability of their participants to the assets they commit to the enterprise, and there are other similarities. The LLCc forms may differ, but the substance is the same: there is a formation document (normally called articles of organization, as compared to articles of incorporation of a corporation) and a governing document (normally called operating agreement, as compared to the bylaws of a corporation). The remaining LLC forms (minutes of organization meeting, documents evidencing ownership of interests in the LLC, etc.) are also quite similar to their corporate counterparts.

. In those cases where pass-through taxation is essential, and where the entity does not qualify for the S corporation election, the choice is obvious. Where pass-through taxation may be obtained with either entity and there are advantages to S corp tax treatment, an LLC may obtain the same advantages by first electing to be taxed like a corporation, then filing an s corp election. In fact, all other things being equal, forming an llc is preferable to incorporating.PROS AND CONS OF LIMITED LIABILITY COMPANIES:

Major benefits of LLCs over the traditional business entities that were available up till now (corporations, partnerships and sole proprietorships) include the following:

Unlike a general partnership, owners of an LLC have limited liability; and, unlike limited partners in a limited partnership, they do not lose their limited liability if they actively participate in management.
Under the IRS "check-the-box" regulations, a business that is currently a sole proprietorship is also able to change to LLC form and thus obtain limited liability, with no tax consequences or added tax compliance requirements of any kind, as the IRS will now, in effect, ignore the existence of the one-owner LLC for income tax purposes.
Like a regular corporation (a C corporation), an LLC provides limited liability to its owners, but taxable income or losses of the business will generally pass through to the owners (but any such losses may not always necessarily be deductible, due to the "at-risk" and "passive loss" limitations of the tax law).
An LLC is more like an S corporation, in that it provides for a pass-through of taxable income or losses, as well as limited liability, but can qualify in many situations where an S corporation cannot, since an S corporation cannot:
have more than 100 shareholders;
have nonresident alien shareholders;
have corporations or partnerships as shareholders;
own 80% or more of the stock of another corporation;
have more than one class of stock (or otherwise have disproportionate distributions); or
have too much of certain kinds of "net passive income."
Also, LLC owners may be able to claim tax losses in excess of their investment, such as on certain leveraged real estate investments, which would not ordinarily be possible in the case of an S corporation or even a limited partnership.