Limited Liability Companies

When you start a business, you can set it up in one of several forms depending upon your circumstances, particularly with regards to liability and tax considerations. The least complicated form of business ownership is the sole proprietorship. Other forms include the general partnership, in which two or more individuals join together to carry on a business, or a limited partnership where the structure includes two types of partners. Organizing as a corporation provides the owners with insulation from personal liability. However, the organizational structure of a corporation is formal and controlled by state and federal laws.

In recent years, a new form of business -- the limited liability company -- has gained popularity as a business entity. A limited liability company (LLC) enjoys the benefits of limited liability like a corporation, but also has the tax advantages of a partnership. LLCs permit direct control of the business operations of the company without oversight by a corporate board of directors.

LLCs are commonly used in research and development businesses, technology, oil and gas, and real estate. The LLC is also appropriate for professional service firms (when allowed), like law firms or accounting firms, closely held corporations, or family businesses.

Liability

The debts and obligations of the LLC, regardless of how they arise, are solely the debts of the LLC. A member or manager is not liable for them simply by reason of being or acting as a member or manager. Even if an LLC fails to observe company formalities, this is not a basis for imposing personal liability upon members or managers. Nevertheless, a member may assume liability for the LLC's debts and obligations if such provisions are included in the articles of organization and the member has consented to this in writing. There are specific rules under which members or managers have authority to act on behalf of an LLC when dealing with third parties.

Taxation

An LLC is allowed certain federal tax benefits not given to a traditional corporation. Specifically, the income from an LLC is only taxed once, when it is distributed to the members. Corporate income is taxed twice -- once when the income is earned and again when the income is distributed as dividends to the shareholders.

Another business form not mentioned thus far is an "S corporation." Like an LLC, an S corporation is a hybrid between a partnership and a corporation, providing federal tax benefits and limited liability. However, federal tax law places certain burdens on an S corporation that it does not on an LLC. For instance, an S corporation cannot have more than 35 shareholders, while an LLC may have as many members as desired. An LLC also may be a part of an affiliated group while an S-corporation may not. In addition members have the flexibility of a partnership in structuring the allocation of profits, losses, and distributions in different ratios.

Management

The management of an LLC is also more simplified. Any action of the LLC that requires consent of the members or managers may be taken with or without a meeting, and they may vote either individually or by proxy. Members may withdraw from an LLC at will (called "dissociation") and the LLC must purchase the interest of the dissociated member.

The stability of an LLC has been increased because there are now fewer events that cause dissolution. The dissociation of a member does not automatically result in the dissolution of the LLC or a vote to continue. An LLC only dissolves upon an event that is specifically set forth in the operating agreement, or by the consent of the members, the illegality of the business, and certain judicial determinations or an administrative dissolution.

Organization

An LLC may be organized to engage in any lawful business in Illinois except banking or insurance. (There are also certain limitations on dental and medical practices.) It can even be used for holding property for estate planning purposes or for accepting and executing trusts by fiduciaries.

An LLC may have only a single member. This means that a corporation may form an LLC as a wholly owned subsidiary or an individual may form a wholly owned LLC to separate assets used in a business. Partnerships may now convert into an LLC, and other business entities, including other LLCs, can now merge with one another. An LLC may have a perpetual life, which means that it can exist beyond the lifetime of the original owner(s).

Choosing the best business form is not an easy decision. Although the LLC offers many advantages, you should always seek competent legal, business, and tax advice before making such a decision.

This website is not intended to constitute legal advice or the provision of legal services. By posting and/or maintaining the website and its contents, Lucas Law does not intend to solicit business from clients located in states or jurisdictions outside of Illinois wherein Lucas Law or its individual attorney(s) are not licensed or authorized to practice law.