Business, Legal & Accounting Glossary
A limited liability company (LLC) is a corporate arrangement that offers the shareholders of the company, limited liability with respect to a company’s general operations. That means that a limited liability company structure provides the owners of the company with protection against personal liability. In addition, a limited liability company may exempt the owners from certain pass-through taxes that may be otherwise applicable. As such, a limited liability company may encompass qualities of both the partnership and a corporation. Commonly, a limited liability company formations are relatively small businesses with a small number of shareholders. Although pertinent laws may vary from state to state, a typical limited liability company is not required to have a board of directors, and the transfer of shares is usually restricted. A limited liability company can be registered at the Office of Secretary of State.
A business ownership structure that offers its owners the advantage of limited liability (like corporations) and partnership-like taxation, in which profits are passed through to the owners and taxed on their personal income tax returns.
A limited liability company (denoted by L.L.C. or LLC) in the law of many of the United States is a legal form of business company offering limited liability to its owners. It is similar to a corporation and is often a more flexible form of ownership, especially suitable for smaller companies with a limited number of owners. Unlike a regular corporation, a limited liability company with one member may be treated as a disregarded entity by the IRS. A limited liability company with multiple members may choose, generally at the time that the new entity applies for a US federal taxpayer ID number, to be treated for U.S. federal taxation purposes as a partnership, as a C corporation, or (if it is otherwise eligible) as an S corporation. An LLC can elect to be “member-managed” or “manager-managed.”
Choosing to operate by member management creates a flat member or partnership structure. Choosing manager management creates a two-tiered management structure potentially convertible into a corporation, with the attendant tax consequences. LLCs use IRS Form 1065 (if taxed as a partnership) and Schedule SE (Self-Employment Tax). It is often incorrectly called a “limited liability corporation” (instead of company). LLCs are organized with a document called the “articles of organization”, or “the rules of organization” specified publicly by the state; additionally, it is common to have an “operating agreement” privately specified by the members. The operating agreement is a contract among the members of an LLC and the LLC governing the membership, management, operation and distribution of income of the company.
Managers are the individuals who are responsible for the maintenance, administration and management of the affairs of an LLC. In most states, the managers serve a particular term and report to and serve at the discretion of the members. Specific duties of the managers may be detailed in the articles of organization or the operating agreement of the LLC. In some states, the members of an LLC may also serve as the managers.
Members are the owner(s) of an LLC. Unless the articles of organization or operating agreement provide otherwise, management of an LLC is vested in the members in proportion to their ownership interest in the company.
Operating as an LLC form of partnership does not mean that appropriate US federal partnership tax forms are not necessary, or not complex. As a partnership, the entity’s income and deductions attributed to each member are reported on that owner’s tax return.
LLCs can lose their tax advantage without the partnership structure. The possible label “disregarded entity” for income tax purposes singles out the one-member owner of an LLC as actually earning income and deductions directly. It is the owner, then, who reports as a business proprietor, rather than as an LLC operating an active trade or business. An LLC passively investing in real estate and owned by a single member would have its income and deductions reported directly on the owner’s individual tax return on a Schedule E tax form. And an LLC owned by a corporation–in other words, an LLC with a single corporate member–would be treated as an incorporated branch and have its income and deductions reported on the corporate tax return, creating double taxation.
Companies with limited liability exist in business law world-wide, however, the Limited Liability Company is a specific legal structure defined by the laws of states of the United States and with quite different characteristics. Few other countries have similar structures.
A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute.
LLCs were first enacted by the state of Wyoming in 1977 but can now be created under the laws of any U.S. state. They were chiefly inspired by the GmbH, a type of business organization in Germany, and by limitadas, a type of business organization available in many Latin American countries.
The new form of Limited liability partnership (LLP) (created in 2002) is similar to a US LLC as it is tax neutral: member partners are taxed at the partner level, but the LLP itself pays no tax. It is treated as a body corporate for all other purposes including VAT. Otherwise, all companies, including limited companies and US LLCs, are treated as corporate bodies subject to Corporation Tax if the profits of the entity belong to the entity and not to its members.
Japan passed legislation in 2006 creating a new type of business organization, godo kaisha, a close variant of the American LLC.
The corporate structure in Brazilian law most similar to the United States LLC is the Sociedade Limitada (“Ltda.”), under the new Brazilian Civil Code of 2002. The “sociedade limitada” is the new name of the “sociedade por quotas de responsabilidade limitada”, and it can be organized as “empresária” or “simples”, under this new code, roughly corresponding to the form types of “comercial” [commercial] and “civil” [non-commercial] of the former and now extinct Commercial Code.
Chilean legislation contemplates LLCs as Sociedad Comercial de Responsabilidad Limitada (Limited Liability Commercial Association). Companies working under this structure append the abbreviation Ltda. to their name. Therefore, a company which in the United States is called SomeCompany LLC would be called SomeCompany Ltda. in Chile.
Colombian legislation contemplates a very similar structure as mentioned above in the Chilean case. The Ltda. abbreviation is also used in Colombia.
Serbian legislation contemplates LLCs as društvo s ograničenom odgovornošću. Companies working under this structure append the abbreviation d.o.o. to their name.
Croatian legislation contemplates LLCs as društvo s ograničenom odgovornošću. Companies working under this structure append the abbreviation d.o.o. to their name, same as in Serbia.
Slovenian legislation contemplates LLCs as družba z omejeno odgovornostjo. Companies working under this structure append the abbreviation d.o.o. to their name. Due to high cost and complicated bookkeeping of a real Corporation, this is a more widespread form.
Bosnian and Herzegovinian legislation contemplates LLCs as društvo s ograničenom odgovornošću. Legislation is very similar to Croatian. Companies working under this structure append the abbreviation d.o.o. to their name.
In Russia and certain other ex-USSR countries, an entity with a somewhat similar structure is known as Общество с ограниченной ответственностью (lit., ‘Society with Limited Liability’), usually abbreviated OOO, or in some CIS countries as OsOO.
Most states require that the company name contain one of the following terms, with some variation by state:
Limited liability companies may not use the following terms on their own:
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This glossary post was last updated: 24th April, 2020 | 8 Views.