IF YOU'RE STARTING a business, or buying one, or perhaps expanding one, then you'll want to consider what type of business organization is best for you. You'll probably want something that protects you from personal liability, is easy to administer, and gives you tax advantages.
A relatively new form of business organization, the limited liability company (LLC), may be just what you're looking for.
An LLC gives you protection against personal liability (for company debts, lawsuit judgments against the business, etc.). just like a corporation. As an owner of an LLC, you won't be at risk for more than the money you invested - creditors won't be able to come after your personal assets.
Several other features of LLCs make them a ttractive. First, the owners (called members) have full management rights. The limited partners in a limited partnership can't take part in the control of the business. And the three tiered management structure of shareholders, directors, and officers of a corporation is cumbersome. The members of an LLC can take an active part simply and directly.
Second, LLCs are taxed like partnerships, rather than like "C" corporations. That means income is taxed once (as income to the members) rather than twice (as income to the corporation and then as income to the shareholders).
Third, as a member you have some protection against unacceptable new members becoming involved in managing the business. Under many state LLC laws, members can freely transfer their financial rights in an LLC, but their right to participate in the governance may not be transferred without the consent of the remaining members. (Of course, the flip side is that this restriction may make it harder to dispose of your ownership interest in an LLC than your shares of stock in a corporation.)
Fourth, you and the other members can be creative in how you agree to divide profits and losses. There's no requirement that these be divided according to the percentage of ownership, but there is such a rule for corporations.
Fifth, there are no restrictions on the number or type of persons who can be members of an LLC, or the types of ownership interest. That means LLCs can be used in far more situations than "S" corporations (a tax status for small corporations that enables their income to be taxed only once).
How They Grew. Don't be surprised if you've never heard of limited liability companies. They're a pretty new form of business entity in the United States. The first LLC statute in this country was enacted in 1977 by Wyoming. Florida adopted a similar act in 1982. Very few LLCs were formed, however, until after 1988 when the Internal Revenue Service ruled that they would be generally taxed like partnerships rather than C corporations.
Organizing an LLC. Your lawyer can help you set up an LLC. Though requirements vary by state, a limited liability company generally must have two documents. The first is generally referred to as articles of organization. It must be filed in the Office of the Secretary of State in the state where the LLC is being formed.
The second required document is generally referred to as an operating agreement. It is also sometime called a member control agreement or referred to as regulations. This agreement is similar in format and content to a partnership agreement, and your lawyer must draft it with great care. It does not have to be filed in any public office.
Best for You? An LLC might not be best for your particular business, but they have so many advantages that you should at least consider them strongly. Consult your lawyer to weigh the pros and cons.