Limited Liability Companies

A Limited Liability Company, or "LLC", is an unincorporated business entity that is similar to both corporations and partnerships.

Like a corporation, the formation of an LLC shields its members from personal liability for the debts and obligations of the company.

Like a partnership, an LLC is typically formed by the filing of a "Articles of Organization" or similar certificate with the Secretary of State. Also like a partnership, the members of LLCs typically enter into an operating agreement that establishes how the LLC is governed.

Many of the provisions of an LLC operating agreement are similar to those contained in partnership agreements. For example, the operating agreement usually contains a "buy-sell" agreement governing how and to whom shares in the LLC may be transferred.

LLCs may have an unlimited number of owners and there are no restrictions on the type of persons who may be owners. Some states require that an LLC have at least two owners. Additionally, an LLC may have more than one class of equity interest, as well as wholly owned subsidiaries whose assets, liabilities, and operating results will be treated independently from those of its LLC parent.

One advantage of an LLC over a corporation is that there is more flexibility in management. For example, an LLC may be managed in the following ways:

• Solely by its members
• By its members and a management committee serving in a function similar to the board of directors of a corporation
• By its members, a management committee, and officers

Further, an LLC, unlike an S corporation, may provide for allocations of profits, losses, and distributions disproportionate to the percentage of equity interest held in the LLC.

Because an LLC combines the insulation from personal liability of a corporation with the tax advantages and managerial flexibility of a partnership, it will, in most cases, be the entity of choice for new businesses. Moreover, using the LLC form of conducting business will not be an impediment to raising capital in offerings of the company’s securities because of the protection against liability afforded to equity holders and the ability to provide for free transferability of equity interests. Many states now permit professionals to operate their practices through LLCs, but in such instances a professional may have personal liability not only for their own negligence or misconduct, but also for the negligence or misconduct of other professionals under their direct supervision.

Tax Treatment of Limited Liability Companies

If you would like more information regarding whether an LLC is the right choice of business entity for you, please contact the Law Offices of Afshin A. Asher, Inc.