Why is the limited liability company gaining popularity as a business entity?

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.

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