Facts about Limited Liability Companies (LLCs)
Essentially, a U.S. Limited Liability Company (LLC) is a cross between a corporation (such as a UK “Ltd” or Limited Company, German “GmbH” for Gesellschaft mit beschränkter Haftung or “Company with limited liability”, French “SARL” (literally société à responsabilité limitée or Private Company) and a partnership.
The state of Wyoming enacted the first Limited Liability Company Act in 1977. Because of the uncertainty of treatment by the IRS, the Limited Liability Company concept was not widely accepted at first. However, in 1988 the IRS ruled that the Limited Liability Company, formed under Wyoming Law was eligible for pass-through tax treatment, which then removed the uncertainty of the tax code.
Today, all 50 states of the United States have a version of the Limited Liability Company.
Here are some facts about forming a Limited Liability Company over a Partnership or Corporation:
- In some states, a Limited Liability Company requires a minimum of two members, while a corporation may incorporate it with one shareholder.
- It is not advisable to organize a Limited Liability Company with one member due to negative tax treatment.
- A Limited Liability Company is recognized as a separate legal entity from its members.
- In the majority of cases, the Limited Liability Company alone is liable for the company’s debts and other liabilities and, therefore, grants its members protection from the loss of personal assets.
- If any member of the Limited Liability Company gives personal guarantees for the debt of the company, that member may be called on to pay a delinquent debt.
- A Limited Liability Company is not required to hold regular meetings of its members.
- Typically, management and control of a Limited Liability Company is assumed by its members and, therefore, does not require a Board of Directors.
- Voting rights usually correspond directly with a member’s interest in profits.
- Membership cannot be transferred or new members admitted without the consent of the majority interest.
- Traditionally, Limited Liability Companies have a limited life, which is usually about 40 years or on the death of a member.
- Limited Liability Companies have a “pass-through” or “flow-through” taxation status. In other words, the Limited Liability Company has no Tax Liability. The profit is taxed when distributed to the members as personal income.
- A member may be a non-resident alien. This means he does not pay U.S. taxes on income not derived in the U.S. through business or trade.
- Non-resident aliens can fully own a Limited Liability Company
- A Limited Liability Company is organized when the Articles of Organization are filed with the local office of the Secretary-of-State.
- A Limited Liability Company requires an operating agreement. An operating agreement may be verbal or in writing.
- A Limited Liability Company is required to annually file form 1065 with the IRS. Form 1065 is just an informational return that sets out the names of each member and his share in the profits or losses of the Limited Liability Company. The IRS reviews this report in order to ensure that members who are U.S. citizens properly report their income.
Limited Liability Company