The Limited Liability Company

Topics: Corporation, Types of business entity, Limited liability company Pages: 2 (459 words) Published: April 15, 2013
THE LIMITED LIABILITY COMPANY

A popular form of business, especially with small businesses, is the hybrid form of business, the limited liability company (LLC) or a limited liability partnership (LLP), which combine the best features of a partnership and a corporation. In 1988, the Internal Revenue Service (IRS) ruled that the LLC may be treated as a partnership for tax purposes, while retaining its limited liability for its owners. Since this ruling, every state has passed legislation permitting limited liability companies. A limited partnership consists of general partner and limited partner. Limited partners invest in the business, but do not participate in its management. A limited partner’s share in the profits and losses of the business is limited by the partnership agreement. In addition, a limited partner is not liable for the debts incurred by the business beyond his or her initial investment.

The LLC differs slightly from the LLP, because in the latter the partners may be liable for some, but not all, of the debts of the business. However, the distinction is subtle and most rules that apply to an LLC apply to an LLP as well. Though state laws vary slightly, in general, the owners of LLCs have limited liability. Therefore, the LLC and LLP forms represent a hybrid, with the best of both partnerships and corporations. The owners of an LLC are referred to as members, and these owners may be individuals, partnerships, corporations, or other entities. Though there are few restrictions to who may form an LLC, banks and insurance companies are not permitted to operate as LLCs. Some types of companies that are prohibited from doing business as a corporation may be permitted to form an LLC. For example, accounting companies may operate as an LLC or an LLP, but cannot operate as a corporation.

The LLC is not considered a form of business for tax purposes, so a company formed as an LLC must file as a corporation, a partnership, or a sole proprietorship....
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