Business Planning - Limited Liability Companies (LLC)

A limited liability company (L.L.C. or LLC) is a form of business entity that provides personal liability protection to its owners, while simultaneously giving the flexibility of a partnership or sole proprietorship. Thus, an LLC is a hybrid business entity between a corporation and a partnership. Essentially, the primary characteristic an LLC shares with a corporation is limited personal liability, and the primary characteristic it shares with a partnership is the flexibility of a partnership and the availability of pass-through income taxation. It is often more flexible than a corporation and it is well-suited for companies with a single owner.

Owners of an LLC are called members and the individuals who have control over the entity are called managers. Members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Texas also permits “single member” LLCs; those having only one owner. Certain businesses can not be in the form of an LLC, such as banks and insurance companies. Additionally, you may form an LLC in one state but operate in another. To do so, you may have to register the out-of-state LLC as a “foreign LLC.”

For tax purposes, the federal government does not recognize an LLC as a separate classification. Thus, an LLC business entity must file as a corporation, partnership or sole proprietorship tax return. An LLC that is not automatically classified as a corporation can file IRS Form 8832 to elect their business entity classification. A business with at least 2 members can choose to be classified as an association taxable as a corporation or a partnership, and a business entity with a single member can choose to be classified as either an association taxable as a corporation or disregarded as an entity separate from its owner, a “disregarded entity.” IRS Form 8832 can also be filed to change the classification of an LLC.

We find that an LLC is the appropriate choice of entity formation for most businesses which we plan. The flexibility and pass-through nature of the LLC provide the best of both the corporation or partnership/sole proprietorship formats. Case law has upheld the liability protection of the LLC and early concerns that the LLC would not provide the same protection as corporations have turned out to be unfounded. We discuss each client’s needs specifically and help them to determine which entity is right for their situation.