Limited Liability Company (LLC)

A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute.

A limited liability company has a combination of partnership and S corporation characteristics. An LLC has the corporate characteristic of limited liability and the tax advantages and flexibility of partnerships. Under the law, an LLC is considered a separate legal entity and is formed by filing Articles of Organization with the North Carolina Secretary of State. Two or more owners, or “members,” must submit the appropriate paper work. LLCs merit a word of caution to potential business owners. There is a lack of public, judicial, and administrative authority and familiarity regarding the classification and operation of an LLC. An accountant and a lawyer versed in the legalities and organizational structure are recommended.

LLC Advantages

1. LLC is considered a separate legal entity
2. Unlimited number of shareholders, unlike the S corporation limit of Subchapter S corporation requirements
3. It must be a domestic corporation
4. It must not have more than 75 shareholders (if stock is purchased jointly, a husband and wife are considered one shareholder)
5. Citizens or resident aliens must own all stock
6. It must have individuals, estates, and certain trusts as shareholders
7. It must have only one class of stock
8. It must have an election with all shareholders present

LLC Disadvantages

1. Significant cost involved
2. Requires time to file appropriate paperwork
3. Legal and accounting assistance recommended
4. Requires at least two members
5. Lack of familiarity by public, professional advisors, judicial, and administrative authorities
6. LLC has a finite existence (30 or fewer years)
7. Congressional investigation could potentially change LLC tax status
8. Lack of legal precedent (i.e., no past history indicating how a court is likely to interpret the law)

LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.

Owners of an LLC are called members.  Since most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities.  There is no maximum number of members. Most states also permit “single member” LLCs, those having only one owner.

A few types of businesses generally cannot be LLCs, such as banks, insurance companies and nonprofit organizations.  Check your state’s requirements and the federal tax regulations for further information.  There are special rules for foreign LLCs.

For additional information on the kinds of tax returns to file, how to handle employment taxes and possible pitfalls, refer to Publication 3402, Tax Issues for Limited Liability Companies.

• Useful Forms for Limited Liability Companies (LLC)

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