One of the most popular business entities today is the Limited Liability Company (LLC).
The LLC combines the flexibility and pass-through taxation potential of a partnership, while providing its members with the personal liability protection of a corporation.
The LLC is a distinct legal entity, capable of suing and being sued, much as a corporation is a distinct entity from its shareholders.
Contributors to an LLC are referred to as “members”, and their involvement in the operations and management of the LLC will vary depending on the nature of the LLC.
There are three basic options for management of an LLC:
1. Member-Managed LLC
In a “Member-Managed” LLC, each of the members of the LLC will participate in the operation and day-to-day management of the LLC.
In this regard, a Member-managed LLC will function like a General Partnership, but with the limited liability of a corporation.
2. Manager-Managed LLC
Manager-managed LLC’s turn over the day-to-day operations of the LLC to a professional “manager”, who may either be a member of the LLC, or the n outsider to the company. The rest of the members of a Member-Managed LLC will act much like limited partners in a Limited Partnership – i.e. they will contribute capital but not management expertise.
3. Single-Member LLC
Since 2000, the State of California has recognized single-member LLCs as a legal entity.
Under the Internal Revenue Code, Single-member LLC’s will be disregarded for Federal tax purposes, and the income must be reported on the Individual member’s tax return. All assets and liabilities are treated as if they are owned by the individual member.
Single-member LLC’s may be ideal for sole proprietors who wish to protect their personal assets from liability, but retain the same tax characteristics of a sole proprietorships. Also, they may be ideal for personal real estate holdings.
In the next post, we examine the numerous Limited Liability Company advantages.
