The term LLC or Limited Liability Company is a relatively new term when it comes to types of business structures. The first LLC was formed in Wyoming in 1977 with the aim of providing small business owners with a new form of company structure that would be more flexible and less rigorous in the statutory requirements of operation than that required for a regular corporation.
An LLC can best be described as a partnership where each member of the organization enjoys limited liability protection. Under a traditional partnership structure, each partner shares the profits equally and is personally liable for any losses incurred during the operation of the business. The limited liability protection of an LLC separates each member from the personal liability for any debt incurred by the entity. This keeps the personal assets of each member distinct from the company’s assets. Additionally LLC’s can raise financing through offering a membership interest for sale, rather than a partnership which would have to raise funds through borrowing or rewriting the partnership agreement. Certain types of companies are prohibited from becoming an LLC such as banks and insurance companies, although the exact companies ineligible for this type of corporate structure varies from state to state.
An LLC also offers considerable taxation benefits. A shareholder or owner of a typical corporation would normally be subject to corporate tax on any income generated by the company in addition being taxed on their personal income. A member of an LLC does not have to deal with this ‘double taxation’ as there is a ‘flow through’ of funds treating all income generated from the operation of the business as personal income for taxation. Additionally, and significantly different to a standard partnership, the profit allocation does not have to be equal between the members and can be defined on an individual basis.
The rules governing the formation and structure of an LLC are also less rigid. An LLC is not restricted on the number of its members and is not required to create or comply with statutory corporate bylaws or record minutes of any company meetings. In order to form an LLC the members need to prepare the Articles of Organization with basic information about the company and file it with the Secretary of State. Many states require, and most LLCs also create, an Operating Agreement. This usually contains the basic structure of the LLC and the rules under which it operates. As this is largely voluntary most LLC’s Operating Agreements are very broad in their statements and stay loosely in line with any applicable state regulations.
One point to remember when establishing an LLC is that this is a relatively new structure and at present there is very little case law and regulation in existence to regulate exactly what the limits are. Therefore it would be wise to secure the advice of a Orlando CPA who keeps abreast of the latest changes in the LLC regulatory and legal environment.