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
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
I wish you well.