First appearing around the late 1970s, the limited liability company (LLC) is the newcomer among business entities, which prominently features the partnership and corporation. Despite its neophyte status, the LLC has expanded rapidly in terms of both its use and appeal. This impressive expansion is somewhat unsurprising, as the LLC offers a package of benefits to its users the partnership and corporation can’t match.
Where the partnership involves tax advantages, the corporation provides the shield of limited liability. The LLC offers the best of both worlds. Members of an LLC enjoy the dual benefits of pass-through taxation and limited liability.
As a pass-through entity, an LLC’s profits and losses are addressed on the personal income tax filings of the company’s members. This avoids the costly phenomenon of double taxation.
While the pass-through taxation aspect is nice, it’s the limited liability that usually attracts sole proprietors and other unincorporated individuals to the LLC. This limited liability prevents creditors and individuals who file suit against an LLC from reaching the personal assets of its members. Instead, the extent of the liability is limited to the value of the LLC. This means that if plaintiff A sues LLC X, any judgment he receives will be limited to LLC X’s value. Moreover, that judgment is precluded from reaching LLC Member C’s personal assets valued at 150K.
As an extension, individuals interested in creating or growing their early stage LLC should be aware that as the equity of the LLC grows, the liability ceiling also increases. That’s why it’s prudent to create various LLCs to manage different properties or branches of a business, effectively distributing liability across the spectrum. This is especially true for real estate managers and brokers.
One important note on the limited liability: it’s essential that the business being run or the property being managed is controlled and/or owned by the LLC. Simply having an LLC without legally affiliating it with the business or property it’s intended to protect will not entitle its members to limited liability, and can leave them exposed personally.
Ultimately, when developed and used correctly, the LLC is truly an embodiment of utility, flexibility and simplicity. If you’re thinking about starting a business or organizing your existing venture, speaking with a qualified attorney about the LLC can make all the difference.
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