THE PRIUS AND THE LLC

The LLC, like the Prius, is a hybrid. The LLC has replaced C corporations, S corporations, Limited Partnerships, Limited Liability Partnerships, and other entities for carrying on many businesses.

LLC or L.L.C. stands for "Limited Liability Company." First recognized in Massachusetts in 1996, it is a hybrid, devised to share the best elements of corporations and partnerships.

A corporation generally provides protection for shareholders against liabilities of the corporation (hence "limited liability.") If the corporation becomes bankrupt, in most cases the shareholders are not personally liable for the debts of the corporation.

Most corporations are taxed under Subchapter C of Chapter 1 of the Internal Revenue Code. The earnings of a C corporation are taxed to the corporation. Thus, there are two layers of tax - one at the corporate level and one at the shareholder level when the money passes to the shareholder.

Some corporations may elect to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. The earnings of an S corporation are taxed directly to the shareholders.

Corporations are complex, and it is difficult or impossible to structure special arrangements, as, for example, sharing income in different ways among shareholders.

Partnerships are more flexible, but, except in the case of limited liability partnerships, do not protect partners from liability for partnership debts. Additionally, one partner may be liable for the actions of another partner.

An LLC offers limited liability to its owners. For federal tax purposes it is a "disregarded entity", unless it elects to be taxed. It passes income through to its members.

The members of an LLC can establish their rights with respect to each other in ways that would be impossible in a regular corporation. LLCs can be used to hold real estate, for joint ventures, or for other purposes. An LLC may be a general or limited partner in another entity - often we see multiple relationships of LLCs, as in a multiclass fund vehicle.

An LLC may have many members or only one member. It is a marvelous device to hold rental real estate. We will cover LLCs, corporations, and partnerships in more detail on our website. Call us if you think an LLC might be useful for your business venture.