A limited liability company combines the advantages of a corporation with
those of a limited partnership, but there are several reasons why a limited
liability company may be preferable to either of these entities. One advantage
is that you can avoid double taxation with a limited liability company.
Since the limited liability company is not a corporation, you can avoid
corporate income tax if you so choose, because income from the limited
liability company can be taxed personally to its members as it would be
with a partnership. As a hybrid entity, the LLC features both the limited
liability advantage of the corporation with the favorable single income
taxation of the partnership. More importantly, a member’s interest
in the limited liability company gives his creditors only the charging
order remedy, which is the same as with the limited partnership (LP).
Because the limited liability company compares protectively to the limited
partnership, it is an equally attractive vehicle to title and protect
personal assets. Moreover, since neither the limited liability company’s
managers nor its members have personal liability for the debts or liabilities
of the limited liability company, it is oftentimes ideal to hold liability-producing
assets or to conduct a business. Overall, the limited liability company
offers several significant benefits over the corporation and other traditional
forms of business organizations. But there are also several disadvantages
with the LLC: First, limited liability companies do not enjoy the corporate
advantages of prior IRS rulings concerning the sale of worthless stock
or stock sold at a loss. Secondly, LLC membership interests do not enjoy
the same ‘discounted valuations’ for estate tax purposes as
limited partnership interests. Thirdly, selling 50 percent or more of
the ownership of the limited liability company in any twelve-month period
ends any tax advantages the limited liability company may have had with
the IRS. Fourth, limited liability companies cannot engage in tax-free
reorganizations. And finally, owners of limited liability companies pay
higher unemployment taxes on their own earnings than do corporate officers.
As you can see, there is no one perfect entity. You must consider a wide
range of factors when you decide upon your best organizational choice.
And this decision should involve both your accountant and your attorney.