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Published Articles by David Balovich

Title: What is a LLC?
Published in: Creditworhty News
Date: 2/27/01
The subject of this column comes from Gregory in Racine, Wisconsin who writes that he would like to know what is a LLC and how it differs from a subchapter S corporation or a limited partnership.

The simple reply is that a LLC (limited liability company) is a mixture of a subchapter S corporation and a limited partnership. The owners are called members rather than shareholders and it is run by managers rather than officers. Thus, a LLC is managed by its members or managers in the same or similar fashion as a corporation is managed by its officers and directors. A LLC does not require its members to be natural persons therefore a LLC can be composed of individuals and/or corporations.

LLC's are created through the Secretary of State's Office similar to a corporation. A LLC may also do business under an assumed name in which case it must file an assumed name certificate like any other entity.

The limited liability company has the characteristics and benefits of both a corporation and a limited partnership. Membership interest is a personal property interest and it may be evidenced by a membership certificate similar to a stock certificate. Members, like shareholders in a corporation, do not own any specific property in the LLC; all of the assets in a LLC are owned by and are held in the name of the LLC.

LLC has the benefit of a subchapter S corporation, in that a LLC can shield its members from personal liability arising from operations of the business and is treated as if it were a partnership for federal income tax purposes. A LLC, however, does not have the restrictions which limit the number of owners as a subchapter S corporation does. For instance, a LLC can have more then thirty-five members (the maximum in a subchapter S corporation); it can have foreign members (not permitted in a subchapter S corporation), it can be involved in different lines of businesses (subchapter S corporations must receive 80% of revenue from one line of business).

One of the most significant features of the LLC is how it is managed. Many investors like the limited partnership form of business because they can invest money and not be liable for the business' debts or failure. The drawback of a limited partnership is that the limited partners may not be involved in the partnerships' day to day activities and still retain their limited liability. In a LLC an investor may have direct input into the management of the business without assuming personal liability for the company's debts. Since a member of a LLC is not a proper party to a lawsuit by or against the LLC, the LLC may provide more protection than a corporation. In the past persons wanting to avoid double taxation, which occurs when one does business as a corporation, chose partnerships to conduct their business. Now, most of what was done in a corporation or a partnership can be accomplished by forming a LLC.

A drawback to the LLC is that the regulations of the LLC may be challenged by the IRS or a court if the business is deemed not to be run properly. Current tax law is well developed on corporations, however, the laws governing LLC's are just beginning to be developed.

Finally, although the limited liability company is growing in popularity not all states recognize them as a legal entity. Generally, those states who do not yet recognize the LLC treat them as limited partnerships.

For more information contact your Secretary of States Office to determine if LLC's are recognized in your state. If so, contact your legal counsel for information on either forming or doing business with a Limited Liability Company.

PS: I would like to thank David Schmucker and the members of the Business Products Credit Association for inviting me to speak at their regional conference in Tampa last month.

I wish you well.

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