Limited Liability Companies (LLCs)
A limited liability company (LLC) is a hybrid business entity that has characteristics of both a corporation and a partnership (or sole proprietorship depending on how many owners). An LLC, although a business entity, is a type of unincorporated association and is not a corporation (calling it a limited liability corporation is incorrect). The primary characteristic an LLC shares with a corporation is limited liability, and the primary characteristic it shares with a partnership is the availability of pass-through income taxation (i.e. no double taxation). It is often more flexible than a corporation, and it is well-suited for companies with a single owner.
Membership interests in LLCs and partnership interests are also afforded a significant level of protection through the charging order mechanism. The charging order limits the creditor of a debtor-partner or a debtor-member to the debtor's share of distributions, without conferring any voting or management rights on the creditor. Limited liability company members may, in certain circumstances, also incur a personal liability in cases where distributions to members render the LLC insolvent.
Advantages
Some advantages of LLCs include the following:
- choice of tax regime: an LLC can choose to be taxed as a sole proprietor, partnership, S or C corporation;
- much less administrative paperwork and record keeping than a corporation;
- pass-through taxation (i.e., no double taxation), unless the LLC elects to be taxed as a C corporation;
- less risk to be stolen by fire-sale acquisitions (more protection against hungry investors).
Disadvantages
Some disadvantages of LLCs are listed below.
State laws regarding stock corporations that are very well developed and provide for a variety of governance and protective provisions for the corporation and its shareholders. However, most states do not dictate detailed governance and protective provisions for the members of a limited liability company. Thus, in the absence of such statutory provisions, the members of an LLC must establish governance and protective provisions pursuant to an operating agreement or similar governing document.
It may be more difficult to raise financial capital for an LLC as investors may be more comfortable investing funds in the better-understood corporate form with a view toward an eventual IPO.
Many jurisdictions levy a franchise tax or capital values tax on LLCs. In essence, this franchise or business privilege tax is the fee the LLC pays the state for the benefit of limited liability. The amount of the franchise tax can be based on the following:
- revenue,
- profits,
- number of owners,
- amount of capital employed in the state.
There can also be some combination of the above factors, or simply a flat fee.
YouTube Headquarters
A famous company that started out as an LLC is YouTube.