A breakdown of the limited liability company and its latest offspring
Most business owners are aware of the limited liability company, or LLC for short. The LLC is a newer form of business as opposed to S corporations, C corporations, sole proprietorships and partnerships, all of which have been around for a while. An LLC is a business structure created and allowed for by state statute. Though states vary, most states also permit “single member” LLCs, those having only one owner. The name of an LLC must include LLC, L.L.C., or Limited Liability Company and cannot have Inc., Corp., Corporation or Incorporated following its name.
To form an LLC, the founder files the Articles of Organization with the respective state. The Articles of Organization are similar to Articles of Incorporation that a corporation, being an S or C status, would file. The fee in Illinois is $600 for a standard LLC, compared to $150 for an S corporation.
The election to be taxed as the new entity will be in effect on the date the LLC enters on line 8 of Form 8832 with the Internal Revenue Service. However, if the LLC does not enter a date, the election will be in effect as of the form’s filing date. The election cannot take place more than 75 days prior to the date that the LLC files Form 8832, nor can it be made effective for a date that is more than 12 months after Form 8832 is filed. However, if the election is the “initial classification election” and not a request to change the entity classification, there is relief available for a late election (more than 75 days before the filing of the Form 8832).
Owners of an LLC are called members, and they own units as opposed to shares as in a corporation. Members enjoy limited personal liability for the debts and actions of the LLC. Since most states do not restrict ownership in terms of number and type, members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members.
Like a partnership, an LLC provides management flexibility allowing any member to legally participate. This is in contrast to limited partnerships that have a rigid form of management limited to general partners.
LLCs have the benefit of pass-through taxation, meaning income is not taxed at the company level. Instead the income “flows through” to the shareholder’s personal tax return. An LLC that is not automatically classified as a corporation can file IRS Form 8832 to elect their business entity classification. A business with at least two members can choose to be classified as an association taxable as a corporation or a partnership. A business entity with a single member can choose to be classified as either an association taxable as a corporation (C or S corporation) or disregarded as an entity separate from its owner, and use a schedule C on the owner’s personal income tax return. Form 8832 is also filed to change the LLC’s classification.
The Series LLC
The Series LLC protects assets in what are known as “series.” In order to set up a Series LLC, the individual companies first must have been enacted into existence by a state legislature. The Series LLC was first called the “Delaware Series LLC” because it was first approved in Delaware. In April 2005, Iowa and Oklahoma passed similar acts. Illinois enacted its legislation in August 2005. Then, Tennessee and Utah passed similar legislation effective in 2006, and Wisconsin enacted a weakened version of the Series LLC. Series LLC legislation was enacted in Texas in 2009.
The fee in Illinois is $850 for the Series LLC. The advantage of the Series LLC is that a company can set up multiple series to protect assets. The assets of one series can generally not be invaded due to the torts or contractual matters in other series. There is the issue that states not possessing Series LLC legislation may not recognize Series LLCs and their intended purposes of limiting liability. If you conduct interstate commerce, try the following to extend your liability and make full advantage of your Series LLC:
- Keep separate books and accounts. This lends legitimacy to the organization of your Series LLC. Operating and keeping separate records and books for each series is paramount in any court case and makes good legal sense.
- Each series should have its own name.
- All contracts should be properly signed. The LLC and the series it belongs to should be included in your signature. Never use a blank signature, “Bart A. Basi.” Even “Bart A. Basi, President ABC LLC” is not sufficient. The proper format is: “Bart A. Basi, President ABC LLC, series XYZ”.
Fortunately, the Series LLC is gaining momentum in legal circles. For instance, the IRS generally recognizes the Series LLC. Also, in California, each individual series must file and pay its own tax, if it operates and/or is located in California. While this may seem to be detrimental, the fact that the IRS and California has recognized series LLC existence is good news.
The genesis of the LLC has been positive for business. With its limited liability and free transferability of ownership, it is the preferred entity of many businesspeople. Its offspring, the Series LLC, is an even better choice for those in business because it further limits liability of the business.
|Meet the Author Dr. Bart A. Basi is president of the Center for Financial, Legal & Tax Planning, Inc., located in Marion, Illinois, and on the web at www.taxplanning.com. Marcus S. Renwick is the firm’s director of research.|