The Limited Liability Company is a hybrid form of doing business that combines characteristics of the corporate structure and the partnership structure. It is a separate entity like a corporation and therefore carries liability protection for all of its members/owners, but is generally taxed like a partnership which has the benefit of flow-through taxation.
The owners are called members and can be virtually any entity including individuals, corporations, other LLCs, trusts, pension plans, etc. Some states, like Iowa, permit one-member LLCs, and others do not. If you are going to do business in multiple states, it may be wise to have at least two members of the Limited Liability Company. A husband and wife are considered two members for formation purposes.
The manner in which the Limited Liability Company will be operated is set forth in an operating agreement, which is an agreement between the members. The operating agreement for a Limited Liability Company is similar to the by-laws for a regular corporation.
In many respects, a Limited Liability Company is very similar to a Sub-Chapter S Corporation. However, the Limited Liability Company provides much greater flexibility with respect to owners and the allocation of income to the owners. An S-Corporation may only have one class of stock, while an LLC may offer several classes of member ownership. Any number of entities or individuals may own interest in an LLC; however, ownership interest in an S-Corporation is limited to no more than 75 shareholders. Also, S-Corporations cannot be owned by C-Corporations, other S-Corporation, many trusts, LLCs, partnerships or non-resident aliens. LLCs are allowed to have subsidiaries without restriction, while S-Corporations are not allowed to own 80% or more of another corporation’s shares.
Like a regular corporation, the primary advantages of forming a Limited Liability Company is the liability protection the corporate entity affords its members (shareholders with respect to a regular corporation). The members of a Limited Liability Company are not liable for the debts and obligations of the company. By comparison, in any Sole Proprietorship or Partnership, the owner’s personal assets may be used to pay debts of the business. Another advantage relates to the on-going existence of the company. If an owner of the company dies or wishes to sell their interest, the corporation can continue to exist and do business. If an owner of a Sole Proprietorship or Partnership dies, generally the business or partnership also terminates.
Unlike a regular corporation, the wages paid to the members of a Limited Liability Company will be subject to self-employment tax; however, self-employment tax may be avoided on members who do not participate in management.
Click here for more information on forming a limited liability company in Iowa.