Simply put, an LLC has the liability protection of a corporation but is extremely flexible on how it is taxed and how it is managed. One major advantage of an LLC is reduced formality, as compared to a corporation. A second major advantage is flow through tax treatment like an S Corporation but without all the rules and restrictions of an S corporation. One disadvantage is that all earned income is subject to social security self employment taxes. Members own the LLC. An LLC may or may not have managers. If the LLC has one or more Members, the Members generally elect the Managers, who make company decisions, carry out company decisions, and take care of day to day business.
Limited Liability Companies
- One person builder with no employees. LLCs give liability protection without a lot of paperwork. The one person LLC is a “disregarded” entity for tax purposes. LLC income would be reported on the owner’s personal tax return. The owner would file estimated taxes and not need payroll.
- The Entrepreneur with Multiple Businesses. Multiple LLCs can afford cross liability protection from each other without a lot of extra accounting and tax reporting expenses.
- The side business for a highly compensated person. If you already make over the maximum limit of Social Security ($132,900 in 2019), you can use an LLC to reduce paying excess payroll taxes. Taxes would be reported on your personal tax return, which takes into account your salary before figuring payroll taxes. If you have more than $132,900 salary from multiple businesses, you and the businesses would pay excess social security taxes. You can get the personal portion refunded on your personal tax return, but your business would not get a refund on the excess contributions it made.
- Real Estate Investments. LLCs are ideal for holding long term real estate. Generally, C corporations should be avoided because of double taxation, and S corporation status can be inadvertently lost. LLCs afford economical liability protection without a lot of extra accounting and tax reporting expenses. Also, real estate transfer taxes can be avoided by selling the LLC ownership, rather than the real estate itself. Investors that rehab properties for quick sale may need to be an S Corporation.
- Separating your operational business from the underlying real estate. Business owners that also own the real estate used by the business should strongly consider setting up their business as one entity and the real estate ownership in an LLC. A small portion of payroll taxes can be saved by renting the real estate to the operational company at the highest reasonable rate. The LLC also makes it much easier to sell the business at a later date while retaining the real estate and renting it to the new owners, should that be desirable at the time.
We offer fifteen standard varieties of LLCs. In addition to our fifteen standard LLCs, we can draft highly customized LLCs for an additional fee. An LLC may or may not have managers. If the LLC has one or more members, the members generally elect the managers, who make company decisions, carry out company decisions, and take care of day-to-day business. An LLC can also be set up with a permanent manager that can not be voted out of office. The five most popular varieties of LLC are as follows:
The first is “Single Member”. It is designed for a limited liability company that shall have only one member for the foreseeable future. A new Operating Agreement must be prepared when any new members are admitted.
The second is “Member Managed,” which is generally used when the owners (members) are all involved in the day-to-day operations of the business and want to make company decisions. It is designed like a simple partnership with no centralized management.
The third is “Elected Manager” with the manager being elected from time-to-time by the members. This variety is used when some owners will not be involved in the operation of the business but want to elect one or more persons (a manager or managers) who will make decisions and run the business. This form is also helpful when the members are companies instead of individuals.
The fourth has an “All Powerful Manager”, much like a limited partnership. This form of LLC applies where one member wants to maintain decision-making power without allowing other members to elect another manager. This often occurs when a business owner may want to share some of the business profits, but not share control of the business. Members that are not managers may be subject to or entitled to passive tax treatment, as the case may be. You should consult your tax advisor before using this type of limited liability company.
A fifth kind of LLC is a “Corporate Style” LLC with shares. This form of LLC is used to mimic the operation of a corporation but be governed by LLC laws. It is the most convenient form of LLC to use when you anticipate adding members over a relatively short period of time. Profit and loss allocations are determined by the number of shares owned and not by capital contribution. Under certain circumstances, profit and loss allocations and distributions can require complex calculations.
Members are the owners of a Limited Liability Company. The member is the equivalent of a shareholder of a corporation or a partner of a partnership. Limited Liability Companies can also have an “economic interest holder” who shares in the profits but does not have the full rights of a member.
Managers, as the name suggests, are the managers of a limited liability company. A manager is the equivalent of a director of a corporation or a general partner of a limited partnership. The manager also has the equivalent powers of officers of a corporation. A manager may or may not be a member (owner). Managers may be elected from time to time or may be permanent managers that can only be removed for serious misconduct. Managers are optional. A limited liability company may be managed by its members.
A Limited Liability Company has the unique ability to choose how it is to be taxed. This provides even greater flexibility for the uses of a Limited Liability Company. A single member LLC can be taxed as a sole proprietorship or as a corporation. A multiple member LLC can be taxed as a partnership or as a corporation. Limited Liability Companies taxed as corporations can elect to be S Corporations if the LLC otherwise complies with the S Corporation rules and regulations. The election to an S Corporation is made by filing the one-page Form 2553 with the IRS. There is no fee charged by the IRS for this filing. For those people that are on the fence about whether to be an S Corporation or an LLC, the LLC is the better choice as it can be easily switched to being taxed as a corporation at a later date.
The IRS will ignore a single member limited liability company for tax purposes. The LLC is still a separate entity for legal purposes! If an individual is the sole owner of an LLC and has not elected to be taxed as a corporation, the IRS ignores the entity. The individual then uses schedule C or E on Form 1040 rather than filing a separate LLC tax return. If a corporation is the sole owner of an LLC and has not elected to be taxed as a corporate subsidiary, the IRS ignores the entity. The corporation then files a corporate tax return only rather than filing a separate LLC tax return.
This provides great simplicity for a one person company to operate like a sole proprietorship and still have the liability protection of a limited liability company. Additionally, the LLC (with no employees outside the single owner) would not be required to have payroll or to file a separate tax return. This also allows individuals or companies with multiple divisions or enterprises an economical way to wall off liability between the various ventures.
Disproportionate Distributions occur when an LLC distributes company profits in some manner other than prorated based on capital invested. An LLC can distribute in any manner allowed under partnership allocation rules. This provides greater flexibility in structuring a business. S Corporations can not do this and must distribute in proportion to ownership percentages.
This question and answer site is provided by the law firm of Robertson & Gable, LLC to educate the public generally about forming corporations, limited liability companies and other business entities. The answers provided are based on Georgia Law and are from the viewpoint of the small business owner. The answers provided are designed to apply to general situations and may not reflect current legal developments. You should not act or rely on any information in this website without seeking the advice of a licensed attorney in your state regarding your specific situation. Use of this site is subject to our full copyright disclaimer and full legal disclaimer.