Limited Liability Companies

    The series of letters "LLC" is becoming so ubiquitous that you might think it’s the name of an up-and-coming relative of a popular mail-order company.

     In fact, LLC, which stands for "limited liability company," represents a new (relatively speaking) way to organize a business, and even though you can’t buy clothes from one, it may just be a more useful way to organize your company.

     Historically, sole proprietorships, partnerships, and corporations (both "C" and "S") have been the forms of ownership and organization of businesses. Each offers varying degrees of protection from the claims of business creditors and each has different income and estate-taxation treatments, as well as unique recordkeeping requirements.

    An LLC provides several advantages over the other three forms of organization. An LLC can give an owner or owners (the Florida

     Statutes refer to owners as members) protection against the claims of business creditors that a sole proprietorship or partnership can’t. Business creditors cannot attach the assets of the LLC’s owners (members), but are "limited" to the amount of capital in the organization. Also, the owners (members) of an LLC can participate actively in the operation of the business without exposing themselves to personal liability.

     LLC’s are taxed similar to general partnerships, which means that income and losses are passed through to the owners (members) and not taxed at the LLC level. The LLC fills out its own tax return with the income or loss of the LLC being allocated to the owners (members) and reported on each owner’s (member’s) individual income-tax return. If an owner (member) actively participates in the operation of the LLC, he or she also is liable for the self-employment (Social Security and Medicare) tax of 15.3 percent on income. Owners (members) who are not actively participating (i.e., who are investors only) are not liable for this tax.

     A disadvantage of LLC taxation is that the maximum individual income rate is 39.6 percent versus the maximum corporate income-tax rate of 34 percent. Also, an LLC is not able to accumulate income to fund future expansion. An LLC can, however, choose to be taxed as a corporation, although there is generally no reason to do so.

     To form an LLC, articles of organization must be filed with the secretary of state and, naturally, fees must be paid. The Florida Department of State’s Division of Corporations maintains a Web site (http://www. sunbiz.org) containing forms that may be downloaded for LLC’s, both Florida and foreign.

     Starting an LLC from scratch or converting from a sole proprietorship or partnership generally presents no unusual tax problems; however, converting an existing "C" or "S" corporation into an LLC can trigger taxable income and can be legally complex. Legal and tax advice should be obtained prior to doing this.

     One caveat: Since LLC’s are a relatively new form of organization, there are legal and tax issues that could arise and provide unwanted outcomes. Most of the known issues have been resolved, however, and this should not stand in the way to using the LLC as a form of business organization.

     LLC’s provide a viable and clearly beneficial form in which to conduct business operations. While they might not be appropriate to all businesses, they are very suitable to most and can provide valuable asset protection and tax savings.