Advantages of a Limited Liability Company

The main benefit of a Limited Liability Company is that its members, like the shareholders of the Corporation, are generally not held liable for the Limited Liability Company’s debts except under circumstances similar to the legal theory of piercing the corporate veil thereby making shareholders liable for the debts of the Corporation as its alter ego.

Limited Liability Company owners are called “Members.” In most states, a Limited Liability Company may be owned either by a single member or by more than one member. If it is owned by one member, i.e., a sole proprietor, it is taxed as a sole proprietorship. If it is owned by one legal entity, such as a corporation, then, for tax purposes, the separateness of the entities is disregarded. If the Limited Liability Company is owned by more than one member it can be taxed as a partnership.

Members of a Limited Liability Company may be persons, corporations, partnerships, trusts, other Limited Liability Company’s, or any other type of legal entity. Unlike “S” corporations, there are no citizenship or residency requirements for members. The Limited Liability Company can be operated by the members themselves, or by their designees known as “Managers.”

Another substantial benefit of a Limited Liability Company is that, in most states, failure to hold or to observe formalities or meetings would not be a factor in deciding a member’s unless such meetings were expressly required in the Operating Agreement of the company. Operating Agreements for Limited Liability Companies are carefully drafted to exclude any requirement of formalities or meetings to minimize the member’s personal liability.

Therefore, it is highly beneficial for a sole proprietor to form a Limited Liability Company so that he will no longer be held personally liable for his company’s debts. Similarly, a Corporation or other legal entity might choose to form a Limited Liability Company for a specific project, thereby avoiding personal financial exposure to possible risks of the project.

Advantages of LLC over a Limited Partnership

A Limited Liability Company offers absolute limited liability to members while in a partnership, one partner, the general partner, has liability exposure. No Limited Liability Company member has personal liability

In allocating non-recourse debt, Limited Liability Companies provide an advantage over Limited Partnerships

Members of a Limited Liability Company are able to participate in management without risking limited liability status. A limited partner may lose his limited liability status should he become involved in day-to-day management

A member of a Limited Liability Company may be exempt from self-employment taxes on distributions if he does not participate in management and if the entity could have been formed as a Limited Partnership

LLC over an S Corporation

While the S corporations limit their ownership to 75 persons, a Limited Liability Company has no limit

There are no restrictions regarding the character of members of the Limited Liability Company

Upon formation, tax-free transfers can be made to a Limited Liability Company

A Limited Liability Company can own 100% of the stock of another corporation, where an S corporation cannot be a member of any affiliated group

Members of a Limited Liability Company can get a basis increase for their share of the company’s liabilities

A member can step up his basis in his share of the Limited Liability Company’s property to reflect his outside basis in membership interest

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