Limited Liability Companies (LLCs) were first introduced in 1977 in Wyoming and has since become a favorite choice for business formation for many different types of companies. Over two-thirds of the companies formed today are LLCs or some variation of a limited liability entity. Previously, only S-corporations were able to get the pass-through taxation treatment, but they had limitations on the number and type of shareholders owning the company. Partnerships, meanwhile, had the same pass-through tax treatment, but lacked the liability protection afforded corporations. The LLC became a hybrid entity designed to allow pass-through taxation and limited liability.
Largely ignored, especially by the IRS, the LLC grew in popularity, especially after the advent of the Delaware LLC Act, which allows business owners to determine how their LLC would be structured and governed by choosing it’s management and taxation style in its incorporation documents and through its governing operating agreement. This created the more flexible LLC we know today and is the standard adopted by many states and gives business owners significant flexibility to draft the contract between owners to fit the unique demands and needs of the parties and business.
LLCs are flexible enough to hold real estate assets for investors who are otherwise not involved in the day to day operations of a business while still shielding them from creditors while also providing a mechanism for a family business to have active participation and roles for different members. There are also variations on the LLC for specific purposes such as a Professional LLC which is formed when members of a certain profession such as doctors or lawyers organize to offer their services. This is commonly used for professionals where a state license is required and only practicing members of the profession are allowed to be owners. In these instances, the limited liability does not include malpractice claims. A Series LLC allows an LLC to have assets in a series of companies, which is useful for real estate holding companies and allows one piece of property to have issues or go through a foreclosure without affecting the other pieces of property.
Because LLCs are so simple to form and offer such flexibility in their details, it is extremely easy to do it wrong. There are many benefits with an appropriate entity formation, including the ability to mitigate your tax burden. It is important to seek legal guidance, especially when going into business with others. A lawyer can help you think through the details of the operating agreement that will best suit your needs, recommend best practices, and work through possible issues between partners in advance. A good lawyer will discuss who is responsible for operating and making decisions and what happens if that person is incapacitated, who has to approve major transactions, and more. While an up-front expense, it will save you significant time, grief, and costs down the road when an issue does arise. We have found that most of our clients successfully recover a multiple of the costs associated with forming an LLC when they engage us.
At Virtus Law Firm, we have substantial experience and tax expertise at company formation and can help you choose the right structure for your business and set up the operating agreement to meet your specific needs. We own and operate a number of businesses and investment companies and are familiar with best practices. Contact us today by calling 612.888.1000 or emailing firstname.lastname@example.org.