The Limited Liability Company – An Overview: You Should Probably Use An LLC For Your Business
The final part of our series on entity types for businesses focuses on the limited liability company (“LLC”). Because of its extreme flexibility, ease of use and favorable tax characteristics, the LLC has become the most popular legal entity for small to medium businesses (and in a lot of cases, even large businesses). With a few exceptions, a start up business or small business should being using an LLC as its entity type. Some of the general characteristics of an LLC include:
Formation document: Certificate of Formation (or Articles of Organization), which is filed with the secretary of state of formation.
Governing document: LLC Agreement (or sometimes called Operating Agreement)
Management is initially vested in the Members (owners) of the LLC.
The Members of the LLC then delegate management to one Managing Member (or group of Members), a non-member Manager (which can sometimes be another entity) or a Board of Managers (which can then act formally like a Board of Directors or more informally as a small group).
The Manager (or Board of Managers) can then designate officers to manage day-to-day operations of the LLC.
Certain major decisions or activities of an LLC are typically reserved for approval by the Members or a certain preferred group of Members.
The management structure and operation of the LLC is fully flexible and is agreed upon by the Members and set out in its LLC Agreement.
The equity interests of an LLC – referred to as membership interests – are easily designated into different classes and types of equity (i.e., Common and Preferred Units) with varied rights and preferences.
Distributions are not required to be proportionate to LLC ownership and the economics can be allocated in any way that the Members of the LLC desire
Distribution, liquidation and voting preferences can also be varied and specified by the Members of the LLC in the LLC Agreement
Like limited partnerships and S-Corporations, the profits and losses of an LLC are allocated to its Members for federal income tax purposes, meaning the LLC does not pay an entity level tax or incur “double taxation.”
As stated in the lead in, an LLC is most likely the preferred entity for almost all start up businesses, and most likely almost all other types of business, large and small. In fact, if a small to medium sized business is currently operating as a C-corporation, I would strongly suggest speaking to legal and accounting professionals to determine whether converting to an LLC would be preferable (and it would most likely save the owners of the business significant tax dollars over time). If you have any questions about your business or forming an LLC, please feel free to reach out for a consultation.
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