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Why Should I Form A Limited Liability Company (LLC)?
A Limited Liability Company (LLC) is a business entity that offers limited
liability protection and pass-through taxation. A LLC can be managed by either
its members or by managers.
As with corporations, the LLC legally exists as a separate entity from its owners.
Therefore, the owners cannot typically be held personally responsible for the
debts and liabilities of the LLC.
The LLC allows for pass-through taxation as its income is not taxed at the entity
level; however, a tax return for the LLC must be completed. Any income or loss
of the LLC as shown on this return is passed through to the owner(s). The
owners, also called members, must then report the income or loss on their
personal tax returns and pay any necessary tax.
Advantages of a LLC:
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Members of a LLC are not typically held personally responsible for the
debts and liabilities of the business
LLCs generally have no ownership restrictions
LLC members have flexibility in structuring the management of the
company
A LLC does not require as much annual paperwork, or have as many
formalities, as a C corporation or a S corporation
Written consent of LLC members must be obtained prior to increasing
ownership in the company
Potential customers may perceive an LLC as a more professional entity
than a sole proprietorship or partnership
LLCs allow for pass-through taxation
To create a LLC the proper formation documents, typically called the Articles of
Incorporation or Certificate of Incorporation, must be filed with the appropriate
state agency and the necessary state filing fees paid.
WHY SHOULD I FORM A
LIMITED LIABILITY COMPANY (LLC)?
Page 1 of 4
JOHN G. LLEWELLYN
ATTORNEY AND COUNSELOR AT LAW
4847 CALIFORNIA AVENUE SW; SUITE 100
SEATTLE, WA 98116
V 206-923-2889 F 206-923-2892
A Limited Liability Company (LLC) is often described as the combination of a
partnership and a corporation. This is because a LLC combines the tax
advantages and management flexibility of a partnership with the liability
protection of a corporation.
Forming a LLC has become a popular alternative for sole proprietors and
partnerships that have thought about forming a corporation in order to protect
personal assets. LLCs also avoid "double taxation" because the income of the
LLC itself is not taxed at the company level. Instead, taxes on profits and
deductions of losses are computed at the individual level on the personal tax
return of each LLC member (owner).
Aspects of a LLC
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Limited Liability. Like the shareholders of a corporation, the owners
(called ‘members’) of a LLC have limited liability for business debts. If the
LLC is properly structured and managed, each owner's personal assets
will be protected from lawsuits and judgments against the business, so
each owner's liability is limited to the amount each has invested in the
company.
Pass-Through Taxation. If an LLC has only one owner, the Internal
Revenue Service will automatically treat the LLC as a sole proprietor.
Similarly, an LLC with multiple owners will, by default, be taxed as a
partnership. Owners report their share of the profits and losses of the
LLC on their personal tax returns, and no separate tax is assessed on the
company itself. Note: If you want your LLC to be treated as a corporation
that has to file its own corporate tax return, we can tell you how to file
papers with the IRS to make it happen.
Citizenship. All owners of a Subchapter S Corporation (‘S Corp’) are
required to be citizens or permanent residents of the United States. There
is no such requirement for a general corporation (‘C Corp’) or for a LLC.
Management Flexibility. LLCs have much more management flexibility
than corporations. Also, an LLC may be managed either directly by its
owners or by a manager or managers who may be a member or members
or may be hired to run the business. Although a S Corporation is limited
to 100 owners, a LLC may have an unlimited number of owners.
Simple Recordkeeping. Unlike corporations, LLCs are not required to
hold an annual meeting and draft meeting minutes. Note, however, that
WHY SHOULD I FORM A
LIMITED LIABILITY COMPANY (LLC)?
Page 2 of 4
JOHN G. LLEWELLYN
ATTORNEY AND COUNSELOR AT LAW
4847 CALIFORNIA AVENUE SW; SUITE 100
SEATTLE, WA 98116
V 206-923-2889 F 206-923-2892
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an LLC does need an Operating Agreement that will specify how and by
whom the company will be managed, each owner's name, the amount of
ownership interest held by each owner, and many other items. LLC.com
can assist customers in writing up their operating agreements.
Deductible Expenses. Similar to a corporation, normal business
expenses, like an owner's salary, may be deducted from the profits of a
LLC before the LLC's income is allocated to its owners for tax purposes.
Flexible Profit & Loss Allocations. Unlike a corporation, a LLC is not
required to allocate profits and losses in proportion to ownership interest
(‘member interest’). This means that the owners of a LLC can agree to
allocate the company's profits and losses among themselves however they
see fit and not necessarily based on the percentage of the company each
owner controls.
Nationally Recognized. The LLC is now a recognized business structure
in all 50 states and the District of Columbia.
REAL ESTATE LLCs
Many of our clients form a LLC to hold and manage their real estate in order to
protect their other assets from liabilities or lawsuits that might result from their
real estate investment. If the LLC is formed and managed correctly and there is a
claim or lawsuit relating to the real estate, then generally only the assets owned
by the LLC, and not the investor's other personal assets, will be subject to the
claim or lawsuit. The LLC may not, however, limit the investor’s personal
liability with respect to the investor’s own negligent or intentional conduct. The
LLC can help protect an investor's other personal assets by being properly
formed and properly maintained.
Although both a LLC and a corporation can help protect an investor from
liability, we find that most investors choose an LLC to hold their investment real
estate. A LLC can offer more freedom in the management of the property. For
example, in the LLC Operating Agreement, the investors can expressly set forth
and/or limit the rights, powers and obligations of the manager(s) and the
members. A LLC also may not require some of the formalities of a corporation,
such as annual meetings. In addition, an LLC may have tax advantages over a
corporation, in that a LLC with only one owner may not have to file a separate
tax return and its profit or loss can be included on the owner’s tax filing. In
contrast, a corporation must file a separate tax return.
WHY SHOULD I FORM A
LIMITED LIABILITY COMPANY (LLC)?
Page 3 of 4
JOHN G. LLEWELLYN
ATTORNEY AND COUNSELOR AT LAW
4847 CALIFORNIA AVENUE SW; SUITE 100
SEATTLE, WA 98116
V 206-923-2889 F 206-923-2892
Just one entity, or many?
Although some investors form only one LLC or corporation to hold all of their
properties, some set up separate entities for each property. The factors to
consider in determining whether to form one or more entities include, but are not
limited to: the number of properties, the locations of the properties, and how the
properties are financed. For example, if an investor owns a valuable property
with no debt, he may wish to form a separate LLC (or a series LLC) for that
property such that it is not subject to claims or debts associated with other
properties owned by the investor.
A typical LLC, if properly formed and maintained, will generally protect its
owner’s personal assets from the LLC’s business obligations, but it will not
protect one asset owned by the LLC from being used to satisfy a judgment
relating to another LLC asset. In other words, all assets owned by a typical LLC
are potentially subject to any claim or lawsuit against the LLC. For example,
assume that a typical non-series LLC (ABC, LLC) holds several properties. If a
person is injured at one of ABC’s properties and sues ABC and wins, then all of
ABC’s assets -- even other the properties that it owns -- can be used to satisfy the
judgment against ABC. Thus, ABC could possibly lose all of its properties based
on a lawsuit or claim that related to only one of its properties.
To avoid that risk, an investor can form a separate LLC for each property that he
owns. However, there are costs and administrative burdens associated with
setting up and maintaining numerous separate LLCs.
Do I need to sign the deeds to the properties over to the entity or entities?
In order to get the maximum protection afforded by the LLC, many customers
transfer the property to the LLC so that the LLC becomes the owner of the
property. If the title is not transferred to the LLC, and there is a claim or lawsuit
relating to the property, then the owner of the property may be personally
subject to that claim or lawsuit and other assets may be at risk.
Property owners should be aware that there may be costs associated with
transferring the property to an LLC. Additionally, when the property is used as
collateral for a loan, the property owner will likely need to obtain the lender’s
consent for any transfer of the property.
WHY SHOULD I FORM A
LIMITED LIABILITY COMPANY (LLC)?
Page 4 of 4
JOHN G. LLEWELLYN
ATTORNEY AND COUNSELOR AT LAW
4847 CALIFORNIA AVENUE SW; SUITE 100
SEATTLE, WA 98116
V 206-923-2889 F 206-923-2892