Monday, April 18, 2011

Mythbuster: the "Limited Liability Corporation"

Occasionally I'll hear someone describe a company as a "limited liability corporation," and I'll cringe like an English teacher who has just heard a student split an infinitive.  Or like anyone who hears the sound of fingernails on a chalkboard.

An entity can be a limited liability COMPANY (LLC) or a corporation, but not both.  Countless legal treatises have been written comparing and contrasting the LLC, the corporation, and other business entities, so I will not attempt to summarize all of the difference in this blog post, but here are two big differences:

1. Taxes.  Although an LLC can elect to be taxed as a corporation, LLC's typically choose to be taxed as a partnership (if the LLC has more than one member) or as a disregarded entity (if the LLC has a single member) for federal tax purposes.  Generally, that means income generated by the LLC is taxed just once - each member pays tax on the portion of the LLC's income attributable to such member's percentage ownership of the LLC.  Conversely, earnings of a corporation are taxed twice - once to the corporation when it earns the income, and second to the shareholder of the corporation when the shareholder receives dividends from the corporation.

2. Governance Flexibility.  The rules for operating and managing a corporation are very strict and set out in length in the corporate statutes of the corporation's state of incorporation.  Those rules typically can be modified by contract among the shareholder's of the corporation only in limited circumstances.  On the other hand, LLC statutes are typically very flexible and generally permit the members to enter into company agreements which provide for all sorts of operating and management arrangements.  For example, corporations are virtually always managed by the corporation's directors, while an LLC may choose to be mananged by its members or by managers.

Accordingly, an LLC is often the business entity of choice.  Just don't call it a limited liability corporation!         

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