The Limited Liability Company

The limited liability company (LLC) is a business entity created by statute in every state. The LLC is essentially a combination of a corporation and partnership. The owners, usually called members, enjoy the liability protection of a corporation and the taxation and operation options of either a corporation or a partnership. It is also possible to have a single-member LLC which can operate as a sole proprietor or a corporation. These attributes have caused the LLC to be a preferred choice of entity for many new businesses.

Each state has its own unique LLC statutes. Some of the statutes are binding upon the LLC, such as formation issues. That is, each LLC must submit articles of organization precisely as the statute states. However, most of the statutes are merely default rules for when the LLC members either have no operating agreement or no agreement on a specific issue covered by a default rule. For example, most states’ default rule for voting provides that each member has a vote equal to his ownership interest. However, since this is merely a default rule, the members may agree to override the default rule and have a per capita system of voting.

The LLC combines desired attributes of a corporation and a partnership. Previously, anyone setting up a business typically decided between a corporation and a partnership. Some people would opt for a corporation for its liability protection while others would choose a partnership for its pass-through taxation and more informal structure. With the creation of LLCs, people can now have both.

Most states allow LLC members to determine the management structure of the company. Except for a few states that require a centralized corporate-like structure, the LLC members can choose between centralized management and management by the members. Most members of LLCs choose a partnership-like, member-managed governance structure since this system is very flexible and allows for management by committee, management by a sole member, or management by a nonmember manager.

Flexible Tax Structure
Check-the-box tax regulations allow LLC business owners to elect the desired status for federal tax classification. If no election is made, a single-member LLC is taxed as a sole proprietorship and a multi-member LLC is taxed as a partnership. However, circumstances may be such that a corporate tax classification will be advantageous for the LLC. In that case, the owners merely “check the box” and elect a corporate tax classification. The check-the-box regulations make tax classification a very simple matter. You can always research tax information at Internal Revenue Service.

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