Limited Liability Companies
A hybrid of partnerships, a limited liability company has some of the characteristics of corporations, thus making them unique in the body of business entities.
Partnerships are business associations in which each of the partners are empowered to act on behalf of the partnership. Moreover, each of the partners have unlimited liability with regard to the debts and obligations of the partnership, regardless of whether a partner exceeded their authority. Thus, businesses shied away from partnerships because of the unlimited liability characteristics inherent in that entity.
Corporations, with their hallmark of limited liability, did not fit some business’ needs because corporate structure is relatively rigid. Unlike a corporation, a partnership agreement can provide nearly unlimited scenarios for allocating the economic risks and rewards (losses and profits) and the tax consequences of those allocations.
Thus, out of this mix and need was created the LLC, which LLC affords the members (owners) of the company the ability to fashion an operating agreement (essentially a partnership agreement) which spells out management and governance rights as well as the economic and tax benefits and consequences. At first the IRS was reluctant to grant LLC’s favorable tax treatment, but now there exists a default rule of partnership taxation, though an LLC may elect to be taxed as a corporation.
Seeking out experienced business planners can help sort through the options to meet your objectives, both business and personal. After all, it’s more than just a choice of entity.