Legal Structure of a Business: Limited Liability Company

A Limited Liability Company (LLC) is a relatively new type of legal structure. It has only been in the last 15 to twenty years that states have enacted statutes that allow the formation of this type of entity. At present, all states allow the formation of LLCs, though the laws vary from state to state.

An LLC is comparable to a Corporation in that it gives its members liability protection. But unlike a corporation, an LLC does not impose double taxation. Members of a Limited Liability Company have the same tax treatment as a partnership.

Other advantages of an LLC are that it is flexible to operate, and it doesn’t have as many levels of administration as a corporation. For example, an LLC does not have a board of directors; it is managed by all the members, or by one manager chosen by the members. It is important to note, though, that the formation of both entities is very much alike, and it is done with authority of the Secretary of State.

In an LLC members can be foreign nationals without losing the tax treatment similar to a partnership; this is not the case with an “S” corporation.

Some of the drawbacks are: In some states, such as California, professionals cannot form an LLC. In California in particular, anyone who must be licensed under the Business and Professions Code cannot form an LLC. This includes; not only Doctors, Lawyers, Dentists; but also contractors, real estate agents, and many other types of businesses. Another disadvantage is that it is not as easy for a member of an LLC to sell his or her interest in the company because ownership in an LLC is not as universally recognized as ownership of shares of stock in a corporation. Still another disadvantage is that in many states there must be at least two members to an LLC, though this is not the case in all states.

These are only some of the advantages and disadvantages of an LLC. If you are interested in forming one, consult your attorney, as the statutes and requirements vary greatly from state to state. Still, it is well worth taking a close look into this type of entity because of its flexibility and relative ease of management.