Definition of a limited liability corporation ( LLC )

This paper will first commence by giving the exact significance of a limited liability corporation.
A limited liability corporation ( LLC ) is the usual incorrect name used alternatively of a limited liability company. Therefore the limited liability company and the limited liability company both refer to the same thing. Following the elucidation made above it is hence right to state that a limited liability company ( corporation ) is a lawfully known concern establishment that gives a limited type of liability to its members ( proprietors ) .It must be remembered that the limited liability corporation as it is known is non a corporation but is besides a sort of association that is unincorporated. The lone bing characteristic that is similar between a limited liability corporation ( company ) and a corporation is that both have or give their proprietors limited liabilities.

The LLC bears the flexibleness advantage over the normal corporation. In order to further simplify the definition of an LLC ; it is a concern entity that has both the qualities of a partnership type of concern and a corporation ( Mancuso, 2007 ) .

The Internal gross service authorization has realized that the LLC are really popular due to their flexibleness. The proprietors of these LLCs are besides known as members and these members could run from single to corporations, foreign establishments and even other LLCs.the American LLCs have an limitless figure of maximal members.

Its besides true as regulated by the IRS that certain concern establishments can non be LLCs these establishments include: –

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History of a limited liability corporation ( LLC )

This type of concern has been in being for a piece now and it has been adopted in many parts of the universe, this type of concern is besides protected and bound by jurisprudence in the many different states. There operations might be somewhat different but the chief rules that govern their running remain the same ( Shenkman, Weiner & A ; Taback, 2003 ) . The different history narratives will give a clear a image of how the LLCs operate in the different states and their government rules. This paper will look at the history of LLCs in the United States of America.

History of LLCs in the United States of America

The LLCs in the United States were as a consequence of inspirations from a German concern organisation, the concern organisation is known as the GmbH.The American LLCs besides got their inspirations from the concern theoretical account of many Latin American states besides known as the Lamitadas ( Wood, 2000 ) .

The history of the LLCs in America is quiet interesting with the LLCs doing their first visual aspect in the twelvemonth 1977 in a province called the Wyoming. The Wyoming province had come up with a Limited liability Company act for an oil company, three old ages subsequently there was a opinion by the Internal Revenue Service ( IRS ) and a private missive was issued to the LLC Company that was formed under the Wyoming LLC act. The missive had stated that the IRS would handle the LLC under the Wyoming LLC act as a partnership for the intents of Federal Tax ( Humphreys, 1998 ) .

The IRS would subsequently suggest statute laws that would deny all concern endeavors ( that had proprietors whose liabilities were limited ) the partnership categorization, farther complicating affairs for the LLCs.

Many American provinces introduced the LLC act in the twelvemonth 1988 due to the uncertainnesss that were originating due to the revenue enhancement issue that were confronting the LLCs. This is because the IRS in that twelvemonth did go through a gross opinion that eventually accepted the Wyoming type of LLC companies formed under the Wyoming LLC act as partnerships for revenue enhancement related intents.

Every province had installed an LLC act by the twelvemonth 1996 and in that same twelvemonth a organic structure called the National Conference of Commissioners on Uniform State Laws worked to follow the Uniform Limited Liability Company act. This act was so revised in the twelvemonth 2006.

Facts about revenue enhancement of LLCS

There are a few facts about the Taxation of LLCs that must be noted, these facts include the ordinance and usher lines that have been issued by the IRS to give way on the system of revenue enhancement for the LLC proprietors.

The guidelines besides highlight the type of revenue enhancement returns to be filed and how to register the revenue enhancement returns.

The followers are some of the guidelines given by the IRS

For individual owned LLCs

For the intents of registering a federal revenue enhancement return, it is a common pattern by the IRS to disregard the fact that the concern entity is an LLC.
This measure is merely meant for the revenue enhancement procedure and the concern entity is still lawfully recognized as an LLC.
There are two classs of describing the income and disbursals.

The first class is for those LLCs that are owned by persons and the IRS expects the LLC ‘s income and disbursal to be reported on the signifier 1040, agenda C, E or F.
In state of affairss where the lone member of the LLC is a corporation so the LLC ‘s income and disbursals must be reported on the corporation ‘s return which is form 1120 or 1120S ( www.irs.gov )

Tax for LLCs with multiple proprietors

These types of LLCs normally file a partnership return which is done in the signifier 1065 ( www.irs.gov )

Employment revenue enhancements

All LLCs must run into their employment revenue enhancement demands as stipulated by the IRS, it is hence a fact that all the LLC employees are capable to keep backing revenue enhancement.
The LLCs must besides register signifier W-2 and signifier 1099 upon petition.
The issue of self employment is besides captured by the IRS and it is a demand that the LLCs must register the agendas C or F where the proprietors are capable to self employment revenue enhancements on their net incomes.
In state of affairss where the LLCs file for the partnership returns so the members must pay revenue enhancements on their portion of partnership net incomes ( www.irs.gov )
There is a particular regulation that applies in a state of affairs where the LLC has operating losingss, and this regulation besides limits the sum of tax write-offs because of the proprietors Limited liabilities for the LLC debts.

Advantages of an LLC

Tax flexibleness

The LLCs normally enjoy a grade or room to take in what class to be taxed i.e. the LLCs can either take to be taxed as a exclusive owner, corporation or even as partnerships.

The proprietors ‘ liabilities are limited

Depending on the statute law of a given state the proprietors normally enjoy a grade of protection against
Liability for the debts of the LLC, this would depend on the Torahs that govern the LLC in that peculiar state.

Reduced Administrative Work

The LLCs normally enjoy a much more decreased degree of paper work and besides administrative plants compared to the corporations intending that they would incur less costs by cut downing their administrative plants.

No dual revenue enhancement

The LLCs are usually taxed one time unless they choose otherwise for illustration if they decide to be taxed as the ( C ) corporations

No revenue enhancement at LLC degree

Harmonizing to the revenue enhancement class in which the LLCs are placed they are normally merely taxed from the single degree, this means that the proprietors of the LLCS are the 1s who are taxed but the LLCS are non taxed as the company.

Separate entity

Some Torahs to supply or province that the LLCs are different entities from the persons, hence if an person or proprietor is affected in any manner by the jurisprudence so this does non impact the company or if the company is involved in a legal suit so this does non impact the proprietors of the company.

Harmonizing to Shenkman, Weiner and Taback ( 2003 ) , the other advantage of the LLCs is that the proprietors can normally retain the additions of the company as capital additions or even better as income that is foreign sourced significance that the LLC is able to keep the character of its income this lone happens in instances where the LLC has chosen non to be taxed as a corporation.

Easy puting up of the LLC

It is quiet possible to put up the LLC in some provinces of America because it merely requires one individual to be involved ( physically ) .

Delegating of rank involvements

When it comes to the LLCs it is possible to delegate the rank involvements ; the economic advantage brought approximately by the involvements can be separated and even assigned, this gives the assignee the benefits that result from distribution.

These listed advantages that are enjoyed by the proprietors are most apprehended and the proprietors are acute to work within the confines of the Law.
The proprietors have peculiarly been keen on the revenue enhancement flexibleness of the LLCs as stipulated by most Torahs, therefore the proprietors can bask a far much reduced load of revenue enhancements that are levied therefore they enjoy important net income borders ( www.irs.gov ) .

The fact that most Torahs recognize the LLCs as separate entities it is easy for the proprietors non to be exploited incase of a Legal hassle between the company and any other entity.

With proper and strategic use of the advantages the proprietors can be able to maximise their concern potency and have a competitory advantage in the concern market.

The disadvantages of LLCs

Lack of definite rubric of authorization

One of the major challenges confronting the LLC is the fact that the LLC as a concern entity lacks a definite rubric of the designated authorization that can come in into an understanding or a contract on the behalf of the LLC for illustration the rubric used by LLC include President, Chief executive officer, spouse and pull offing manager.

Menace of being treated as a forgotten entity

Since the LLCs are a new a construct and the many provinces seemingly do non truly acknowledge the LLCs but alternatively see them as exclusive proprietary incases where it is owned by an person or as partnership incases where it is run by a group. This means that the LLCs lose the advantage and alternatively their liabilities become limitless.

The 3rd disadvantage is that in a state of affairs where the LLC is outside the American legal power so there is a greater possibility for the LLC to be treated as a corporate therefore depriving it of the advantages it enjoys as the LLC.

The fact that the LLC ‘s constructions non decently understood by many is a clear index that its response is besides limited among the greater public. The LLC besides does non hold a board of Directors.

In some state of affairss where the LLCs are merely get downing the members are normally required by creditors to personally vouch the loans on the behalf of the company, this straight implies that the members or proprietors become straight apt for the debts incurred by the company.

Trouble in raising capital

This may happen due to the fact that the general operating construction of the LLCs is non understood good by the investors ; hence they are more relaxed to put their money merely because they do non hold the hopes of doing net incomes through the Initial populace offer ( Mancuso, 2007 ) .

There is besides a possibility of the proprietors of the LLC acquiring into problem for non holding an operating understanding ; this is possible chiefly due to the fact that there is no legal requiring for the members to hold one.

How the disadvantages affect the company

Some of the above disadvantages greatly affect the company, get downing by the increased inability to raise capital ; when this occurs or when a company is unable to pull the needed figure if investors to assist it raise capital the operation costs of the company go hard to run into, secondly without the optimal sum of capital the company becomes unable to run into optimally its set out aims and it so even becomes hard for this peculiar company to even spread out.

The deficiency of a definite rubric authorization to come in into understanding might do the possible concern spouses to come in into any binding concern understanding for fright of losing out by either come ining into an understanding with a company representative who does non hold the authorization to lawfully come in into a binding understanding, intending the company might lose out on many concern chances ( Humphreys, 1998 ) .

The issue of legal power and revenue enhancement issues might be unjust to the company and in bend hurt the company net incomes in the long tally, this is chiefly because of the fact that the US LLCs might be considered as corporate for revenue enhancement intents which should non be the instance therefore they will lose more gross through the revenue enhancements levied on them.
Another thing that could truly ache the company is the fact that some creditors demanding that the proprietors guarantee loans that have been taken for the LLC, this non merely strips the proprietors of their right to limited liabilities but besides limits the capacity or the sum of recognition that can be taken for the LLC for one simple ground and that is the fact that the persons might hold a limited capacity to vouch the loans compared to if the LLC took the loan as separate entity ( Humphreys, 1998 ) .

The fact that the LLCs are non truly recognized in many provinces and that incase of an single the LLC is merely recognized as a exclusive proprietary does really restrict its extent of operations and besides exposes it to liabilities that face the exclusive proprietary as a concern entity.

Operational revenue enhancement issues
At the province degree

The operational revenue enhancement issues might non hold counsel at the province degree merely because different provinces do have there different Torahs and guidelines event though the Torahs are harmonized there are those provinces that would otherwise handle the issue of operational revenue enhancement.

Self Employment

There are two facets to this operation revenue enhancement. The first facet is the LLCs class of registering viz. C and F

This largely requires that the members file their self employment revenue enhancements on their earning.

The filing of partnership returns

Here there is a general demand that the proprietors must pay revenue enhancement from their portion of partnership net incomes.

Passive activity

This normally limits the proprietors or members on the sum of loss that they are able to subtract


Buffalo bill, T. , Hopkins, D.A. , & A ; Perlman, L.A. ( 2007 ) . Guide to Limited Liability Companies. ( 9th ed. ) . Boston: CCH.

Humphreys, T.A. ( 1998 ) . Limited liability companies. Sydney: Law Journal Press.

Mancuso, A. ( 2007 ) . Form Your Own Limited Liability Company. ( 5th ed. ) . Edinburgh: Nolo.

Mancuso, A. ( 2007 ) . Your Limited Liability Company: An Operating Manual. ( 5th ed. ) . Edinburgh: Nolo.

Shenkman, M.M. , Weiner, S. , & A ; Taback, I. ( 2003 ) . Get downing a Limited Liability Company. ( 2nd ed. ) . New York: John Wiley and Sons.

“The American Recovery and Reinvestment Act of 2009: Information Center.” Retrieved August 24, 2009 from hypertext transfer protocol: //www.irs.gov/newsroom/article/0, ,id=204335,00.html? portlet=6

Wood, R.W. ( 2000 ) . Limited liability companies: formation, operation, and transition.
( 2nd ed. ) . Atlanta: Aspen Publishers Online.


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