Part Three

What are the disadvantages of a LLC?

A major disadvantage is that there is no reliable continuity. If a member is dismissed, dies, is disabled or resigns, then the Limited Liability Company is dissolved unless the Articles of Organization or Operating Agreement state otherwise. When the Limited Liability Company is formed, it is required in some states that a date for the future dissolution of the Limited Liability Company be recorded. However, a corporation continues to exist as an entity in the event of the death, disability or dismissal of a director(s) or officer(s). There a lot of paperwork involved in creating a Limited Liability Company.

Which is best: a Limited Liability Company or an S corporation?

This decision is dependent upon an individual business and financial structure and situation. It’s best to contact a financial professional or an attorney if there are any doubts. An S corporation avoids the “double taxation” inherent in other business organizations. However, it is not as flexible as a limited liability company. Only U.S. citizens and U.S. resident aliens may own an S corporation. There is a limit of 75 shareholders. A Limited Liability Company offers different levels/classes of membership while an S corporation may only offer one class of stock. There is not a limit to the number of people who can be owners in a Limited Liability Company. A Limited Liability Company can be owned by a U.S. citizen or foreign person, a corporation or another Limited Liability Company. However, S corporations cannot be owned by other corporations, most trusts, Limited Liability Companies, partnerships, or nonresident aliens. In addition, Limited Liability Companies have no restrictions on subsidiaries.

How are Limited Liability Companies taxed?

A Limited Liability Company can be taxed for federal income tax purposes as a partnership. A Limited Liability Company can choose partnership status in order to avoid taxation at the entity level. If a Limited Liability Company is not taxed as a partnership it is often taxed as a C corporation (as chosen on the IRS 8832 form). Some Limited Liability Company owners elect to choose their Limited Liability Company to be a “disregarded entity” for taxation purposes where the owner is fully responsible to report the taxes on his personal tax returns.

What is a Limited Liability Company’s organizational structure?

A Limited Liability Company is owned by its members. The business organization may resemble either a partnership or a corporation depending on who exercises managerial responsibility. A Limited Liability Company resembles a partnership if managers are not used. In this case members have a direct say in managing and day to day activities of the company. A Limited Liability Company would resemble a corporation if its members choose to use managers to administer to the day to day activities of the company because the members will not typically participate in the day to day management.

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