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The Limited Liability Company (LLC) is the newest form of business organization. Legislators realized that business people who desired liability protection in their ventures had the choice between the limited partnership and the corporation. These entities both have disadvantages in terms of tax flexibility and complicated organization requirements. The LLC has the same liability protection for its owners (referred to as members) that a corporation does and all the efficiency and tax advantages of a partnership. Like a corporation, an LLC is established by filing Articles with the Secretary of State. A federal tax identification number or FEIN is also obtained for the company.
However, instead of the cumbersome and rigid corporate book, an LLC sets forth its rules, organizational structure, and agreement of the member(s) in an operating agreement. This flexible arrangement is more similar to a partnership agreement than a corporate book. Although an LLC files a tax return, all tax liability flows through to the individual members. Unlike a corporation, an LLC may disburse compensation to its members more easily pursuant to the operating agreement and without regard to the rigid corporate capital structure. All members in an LLC may participate in management, or the operating agreement may set forth voting rights between managing and non-managing members.
An LLC is particularly well suited for real estate ventures as there are usually varying degrees of management and capital contributions made by the members and there is the desire to avoid the corporate tax structure. However, the LLC is gaining greater acceptance and use in all areas of business.
The main disadvantage of an LLC is cost. The filing costs and attorney’s fees are usually higher than those of the other entities discussed above. In addition, annual reporting and franchise tax burdens of the corporation also exist with an LLC.
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