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Limited Liability Company |
Limited Liability Company |
The structure of a Limited Liability Company (LLC) is the combination of a partnership and a corporation. A LLC has the tax advantages and management flexibility of a partnership combined with the liability protection of its members, as in a corporation.
A Limited Liability Company (LLC) is a relatively new type of business organization permitted under the state laws. In 1988, the IRS issued a revenue ruling declaring that it would treat a LLC like a partnership for tax purposes. By 1996, almost every state had an LLC statute. In 1996, the National Conference of Commissioners on Uniform State Laws adopted the Uniform Limited Liability Company Act, and revised it in 2006.
In all 50 states and the District of Columbia LLC is now a recognized business structure.
Owners of an LLC are called members. LLCs are popular because, like a corporation, its members enjoy limited personal liability for the unpaid debts of the LLC. The liability of any company shareholder is confined to the amount of his capital contribution not paid up, if any. Other features of LLCs are more like a partnership, such as management flexibility and the benefit of pass-through taxation. On taxation issues, income is taxed in the hands of the members instead of the LLC. This is similar to partnership taxation where profits of the partnership are taxed in the hands of the recipient partners instead of the firm.
In the absence of any restriction on ownership pattern of LLCs in most states; its members may include individuals, corporations, other LLCs and foreign entities. There is no limit to the maximum number of members. Most states also permit “single member” LLCs, with only one owner.
However, banks and insurance companies cannot be organized as LLCs.
A Professional Limited Liability Company (PLLC) is a limited liability company organized for rendering professional services. Usually, professionals like lawyers, doctors, accountants and architects can form a PLLC. Norms for PLLCs varies across different states or jurisdictions.
LLCs enjoy management flexibility. LLC may be managed either directly by its owners or by a manager who need not be a member or may be hired to run the business.
Most state laws permit LLCs to frame their own rules of management. This is the source of management flexibility.
Unlike a corporation, an LLC is not required to allocate profits and losses in proportion to member interest or in proportion to the amount of capital contribution by them. So the members of an LLC can agree to allocate the company's profits and losses among themselves, regardless of their proportionate interest or capital contribution.
In case where a member’s interest in a limited liability company is an investment contract, then the same is considered as a ‘security’ subject to federal and state securities law.
An investment contract is an arrangement of common enterprise with the aim of making profits solely from the efforts of others.
In a closely held limited liability company, where all members play an active role in the functioning of the organization, the interest of a member is usually not perceived to be a ‘security’.
However, the interest of an investor in a widely held limited liability company, with centralized management, whose shareholders are spread across different states, is a ‘security’. Accordingly such interest is regulated by both federal and state securities law.
(Morehttp://www.law.upenn.edu/bll/archives/ulc/ullca/2006act_final.htm)
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