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Should You Incorporate?
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Article 7: A Hybrid: The LLC
A Limited Liability Company, or LLC, is a kind of hybrid between sole proprietorships or partnerships and corporations. Whereas corporations have shareholders, an LLC has members.
Like a corporation, this entity protects members from personal liability for the business’ debts and obligations. But profits and losses pass directly through to members, thus avoiding the potential double taxation of a corporation. Care must be taken to avoid negative tax consequences when converting to an LLC from another form of ownership.
It’s important to note that an LLC is not a tax entity itself. Rather, it allows the member (or members) to choose which tax entity (sole proprietorship, partnership or corporation) is preferred and reap the benefits of liability protection and pass-through income. From a practical standpoint, there are few if any situations where an LLC would choose to be taxed as a corporation.
Unlike a corporation (C or S corp), LLCs do not have a perpetual life. Most states require that an LLC list a dissolution date and certain events that can result in the LLC’s dissolution (such as the death or withdrawal of an owner) in its articles of organization. LLCs also are not required to hold shareholders and board of directors meetings, although experts do recommend documenting major decisions of the company.
LLCs can have an unlimited number of owners, including non-U.S. residents, and they are allowed to own subsidiaries without restrictions.
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