Limited Liability Company
A Limited Liability Company is a newer business entity that is a hybrid that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership or sole proprietorship. The owners of a Limited Liability Company are referred to as “members.” Depending on the state, the members can consist of a single individual (one owner), two or more individuals, corporations, or other Limited Liability Companies. Limited Liability Companies can be taxed as a Corporation (either S-Corporation or C-Corporation), as a Partnership, or even as a disregarded entity. When they can be used, a Limited Liability Company often offers the best options available. In some states, such as California, there are requirements of certain professionals to operate as a Professional Corporation, often abbreviated as P.C. therefore would not be able to operate as a Limited Liability Company. Limited Liability Companies can taxed as a C-Corporation, taxed as an S-Corporation, taxed as a Partnership, or can even be taxed as a disregarded entity.
The first thing to consider is if you need can establish a limited liability company. Will your business engage in a regulated industry, such as a doctor or lawyer? If it is, then you would need to determine if your state, like California, requires those occupations to be performed in a “Professional Corporation.” If this is your situation, and you are in a state, like California, that requires the business to be conducted in a Professional Corporation, then you can not consider a limited liability company.
The second thing to consider, if there are no legal issues, is to determine how you want to operate your business. Limited liability companies tend to be structured more loosely. The can have corporate officer titles (President, Vice President, Secretary, and Treasurer), they can have manager(s) or they can also have a Board of Directors.
The third thing to consider is where you want to form your limited liability company. For small businesses, it is often the state that you reside in and plan to do business. If you are planning to operate in multiple states, what state provides you the most advantages or provides for the image that you are trying to achieve.
The fourth thing to consider, what do you want the corporation to be named? It needs to be a unique name and you will want to consider other businesses that may have similar names, website address options, and what suffix you want for the name. A corporation must contain a specific suffix, depending on the state. For example, Colorado requires that the name of a limited liability company shall contain the term or abbreviation “limited liability company”, “ltd. liability company”, “limited liability co.”, “ltd. liability co.”, “limited”, “l.l.c.”, “llc”, or “ltd.” and in California requires that the name of a limited liability company shall contain the words “limited liability company” or the abbreviation “LLC” or “L.L.C.” and that the words “limited” and “company” may be abbreviated to “Ltd.” and “Co.,” respectively.
The last thing to consider is how you want the company to be taxed. Do you want the company to be taxed as a disregarded entity? Do you want the company to be taxed as a partnership? Do you want the company to be taxed as a completely separate entity (C-Corporation) or do you want the corporation to be taxed on the person tax returns of the shareholders (S-Corporation)? An S-Corporation election is only available in limited small-business situations with a limited number of shareholders. This decision must fully explore the corporation’s goals and the best overall tax decisions.