Limited Liability Companies are a relatively new form of doing business that combines:

• The limited debt liability of a corporation.
• Pass through taxation of a partnership, i.e. elimination of double taxation.

In other words an LLC is a hybrid between a partnership and a corporation, you could say an LLC offers the best of both worlds. Like corporations, limited liability companies are separate business entities, they are not an extension of their owners. Limited liability companies are created by the state at the request of one or more people.

A limited liability company is owned by its members. A member in an LLC is analogous to a shareholder in a corporation. Some states require LLC’s to have at least two members, however, the state of Texas allows one member LLC’s. There is no limit to the number or type of partners you can have in an LLC.

Debts of an LLC are solely those of the LLC because an LLC is legally independent from its members who are not liable for any debts or liabilities. However, sometimes especially in small businesses, banks will ask the owners to personally guarantee any loans, in which case owners can be personally liable to pay the loan if the LLC does not have enough cash.

Any kind of investment can be invested into an LLC as long as the other members agree.

Typically an LLC will be managed by its members or the members can hire people to do this job. In fact one of the advantages of an LLC is that members can actively manage the business without losing their limited liability status. There are no requirements comparable to a corporation which should have board of directors and a managerial layer of officers.

Once an LLC is formed members should get to together and should prepare and enter into an Operating Agreement. The Operating Agreement is a contract approved by the LLC members than governs the operations of the LLC and different relationships, the Operating Agreement should address things like:

• What is the exact nature of the LLC’s business, need to define this.
• How are profits and losses allocated to the individual members.
• What are the compensation levels for members and managers.
• What decisions that require unanimous consent of the members.
• What are the procedures to admit new members.
• What happens when a member dies and how does the interest transfer take place.

The elimination of double taxation is the major advantage of an LLC The tax situation is similar to that of an S-corporation, i.e. the income of the corporation is distributed to the members, then each member reports his share of the income on his or her own tax return.

LLC’s addresses many of the concerns faced by small businesses today. LLCs provide the limited liability that is very important for small businesses. A C-corporation does provide the limited liability status but leaves the owners faced with double taxation while S-corporation’s provide the limited liability status and eliminate the double taxation. However, S-corporation’s face some restrictions regarding the number and type of shareholders required.

Members in an LLC can deduct losses in an amount up the sum of their basis in the LLC plus any loans the members made to the LLC. To illustrate this look at the following example:

Two investors A and B each invest $ 100,000 and form an LLC. Now the LLC borrows an additional $ 200,000. If for some reason the LLC fails, then the deductible loss for inventors A and B is $ 200,000 each and not 100,000 each as is the case with an S-corporation. In an S-corporation this situation will occur even if the investors A and B guaranteed the loan. This is an important consideration for investors especially if the business is going to be financed by a loan.

LLCs offer a great benefits in the area of estate planning area due to their flexibility. The following will give a quick overview of some of these benefits, however, you need to consult your legal council for a complete picture:

• LLC offers the limited liability that is vital for protecting yours assets from creditors.
• LLC offers the ability to assign a manager to manage the property, this can be the parent retaining control while giving minority interest to the children over time.
• LLC offers the ability to have different types or classes of memberships in the LLC for example the parent could give away interest in the LLC to children as non-voting interest and thus the parent can stay in control through his or her voting interest in the LLC.
• LLC Operating Agreements provide a lot of flexibility and is allows the parent to retain control over the management and determine the rights of the members and distributions (income allocations to members).

The situation is similar to a corporation in that you can offer your employees tax-deductible benefits such as:

• Retirement plans.
• Savings plans.
• Medical coverage.

However fringe benefits will be taxable to any member who has more than a 2% stake in the LLC.

• An LLC is a separate business entity and typically the owners are not liable for business debts.
• Elimination of double taxation.
• Members can actively manage the business without losing limited liability status.

• A relatively a new form of doing business.