LLC Answers

A "limited liability company" also known as an LLC is an unincorporated (meaning not a corporation) legal entity that is formed under state law and that gives its owners a layer of liability protection.

Compared to corporations and partnerships, the limited liability company is a much newer entity.  Wyoming was the first state to enact the laws to create the first kind of LLC back in 1977. Other states slowly followed but it was not until the IRS enacted regulations in 1997 to provide the limited liability company with tax choice flexibility that he LLC really took off.

The fact that the limited liability company is a relatively new entity is actually a good thing because it is a result of creating a best of breed legal vehicle.  The limited liability company has all the advantages of the two other main legal entities: the corporation and the partnership but without the disadvantages of those same entities.

A corporation’s biggest advantage is limited liability protection for all owners.  Some disadvantages of a corporation include more legally required meetings and formalities, less flexibly statutorily mandated management structures, double taxation, and higher maintenance costs in some states.

The limited liability company affords its owners the same solid limited liability protection as corporations but with much less formalities and other requirements and more choices when it comes to taxation including the default tax classification for an LLC which is pass through taxation (a single layer of taxation).  In addition, the limited liability company can alter its management and ownership structure in many more ways than a corporation can.  This allows for a wider variety of business planning if need be for the business and a lot more flexibility in determining how to best operate and manage the LLC business.

The partnership entity’s biggest disadvantage is that with a general partnership, all owners are personally liable for the obligations of the partnership and with a limited partnership at least one partner is liable.  On the other hand, the partnership entity does provide a lot of flexibility in how the partnership is structure and operated as well as the ownership relationships among partners.

The limited liability company provides the same governance, ownership and operational flexibility as a partnership but also grants limited liability protection for ALL owners.

I will write more about the specific differences in the legal entities in other posts but just know that the LLC is designed to give owners the best of both worlds.

The formation of limited liability companies each year has now surpassed corporations being incorporated - this is a sign that the LLC really is a preferred vehicle for private businesses, real estate, joint ventures, and estate or family planning.