THE LIMITED LIABILITY CORPORATION
by Robert Sullivan, author of "The Small Business Start-Up Guide"
Copyright 1996, Robert Sullivan

The Limited Liability Corporation or LLC is the newest business entity. Wyoming was the first state to approve LLC formation and now all states allow LLC's. (the LLC details for each state are a little different). Owners of an LLC are referred to as "members," either active or non-active status. Active members are taxed like a general partner whereas non-active members are taxed like limited partners but all members enjoy limited liability and may report profits or losses on their personal tax returns. Most states require an LLC to have two or more members but a few states allow formation with only one member (Delaware, Idaho, Missouri, Minnesota, New York and Texas)

LLC's combine the best features of a corporation and partnership. Briefly, the members have limited liability like a corporation while income and losses are passed through to the individual members like in a partnership. The LLC itself is not a taxable entity.

Although an LLC sounds a lot like an S-corporation (Both LLC and an S-corporation avoid double taxation by allowing the pass through of income to the owners (or members) and they both provide for limited liability) the LLC does have some additional flexibility that may be important for some businesses.

Advantages to an LLC

• Limited liability for all members (unlike a general partner)
• No taxation as an entity (no double taxation as in a corporation)
• May have more than one class of stock (This means profits and losses need not be distributed in proportion of ownership, unlike a S-corporation).
• No limit to the number of members (unlike an S corporation)

• Fairly complex to setup properly.
• Each state is slightly different so careful research is required
• No "continuity of life" like a regular corporation. The LLC dissolves if one of the members dies or leaves. (Formal agreements can solve this problems however)