Concept, Similarities and Advantages
A US Limited Liability Company LLC is a hybrid business entity which allows a person or persons to operate their business without putting at risk their personal assets through limiting their liability, without the complexity of the commonly used corporation. The corporation is a company limited by shares, while an LLC does not issue shares and its owners are referred to as members.
In 1874 the state of Pennsylvania enacted a law which authorized the formation of the limited partnership association and is considered to be the forerunner to the Limited Liability Company (LLC), and bears a striking resemblance to it in law. The Limited Liability Company Law was first enacted in Wyoming in 1977 and now all 50 states of the US have similar legislation.
The US Internal Revenue Service (IRS) was unsure at that time whether to treat an LLC like a partnership or a corporation (company limited by shares) for tax purposes. This uncertainty made the business community nervous and the business form was not widely used. In 1988 the IRS finally ruled that a Limited Liability Company (LLC) formed under the Wyoming Statute was eligible for pass-through tax status, in other words, treated like a partnership under the Tax Code. The LLC became popular as a business form which was taxed like a partnership, while allowing personal liability protection similar to a corporation (company limited by shares). After the Wyoming Act of 1977 and the IRS ruling in 1988, the LLC became universally accepted and every state within the union now have legislation enabling this form of business organization.
While each state provides for the formation of a Limited Liability Company, there are differences in minor aspects of the law from state to state; however the fundamental concept is the same.
- The LLC is formed by filing Articles of Organization with the state secretary of State.
- An LLC does not have shares. The owners are therefore not shareholders but members.
- The LLC can be formed with one member.
- Members are not liable for the debts of the entity.
- There is no tax liability on the LLC unless the members clearly choose to be taxed like a corporation (company limited by shares).
- Non-resident aliens may be members of an LLC which has it referred to as an "offshore LLC".
Business Entity Options
In the United States, there are various forms of business entities. Depending on which form is chosen, your tax and ownership considerations change. The common forms of business entities are:
- Sole Proprietor
- Partnership (General or Limited Partnerships)
- Corporations ("C" Corporations and "S" Corporations)
- Limited Liability Company (LLC)
A sole proprietor is the entity in which a person opens a business alone without incorporation or any agreement with others. No forms or filing is required and the tax liability is the sole responsibility of the owner on an individual basis. Any debt or other liability is totally the responsibility of the proprietor and to the extent of all his personal and business assets.
A General Partnership is formed when two or more persons get together to conduct a business or trade. A verbal agreement between the partners is enough; however, a written agreement is encouraged. There are no filing or registration requirements. Each partner is taxed on his share of the profits as distributed by the partnership and treated as personal income.
The downside to this business entity is that partnership debt and other liabilities are the responsibility of the partners and extend to their personal assets.
A Limited Partnership is very similar to the General Partnership, however, the Limited partners are not liable for partnership debt and only their investment is at risk. In the Limited Partnership, there must be a general partner who has total management responsibility. If the limited partner gets involved in management, they risk losing their liability protection. The Limited Partnership is required to file a document with the Secretary-of-State and the partnership is governed by a Limited partnership Agreement.
Taxation is on a personal income basis (flow-through taxation) and the partnership is limited to 35 members.
A corporation is limited by shares, therefore carries with it protection for its stockholders and the corporation pays taxes. The corporation pays taxes on its earnings and the owners pay taxes on the distribution of profits, after tax (dividends), which makes it a double taxation entity. The corporation is formed by filing Articles of incorporation with the Secretary-of-State and the control of the corporation is the responsibility of the Board of Directors, scrupulous records and accounts must be kept.
The subchapter "S" Corporation is a variation of the "C" Corporation and under a different IRS Tax Code. The "S" Corporation is allowed the flow-through taxation treatment similar to that of a partnership and sole proprietorship. Double taxation is avoided by its owners/shareholders. The limitations however are that:
- Ownership is limited to 75 stockholders.
- Owners cannot be corporations, partnerships, pension plans, charitable organizations, certain trust.
- Non-resident aliens cannot be shareholders.
To maintain subchapter "S" Corporation status and therefore flow-through taxation status, there is a requirement for strict compliance with stringent rules.
Limited Liability Company (LLC)
The Limited Liability Company (LLC) is a hybrid with similarities and differences with the other business forms:
- It is a separate legal entity like a corporation
- It does not have shareholders, but rather it has members.
- Its members are protected with Limited Liability. Their personal liability is limited to the amount invested in the LLC
- For USA incorporation the members can be physical persons or entities, including corporations, partnerships, trusts etc.
- Non-residents can be a member of the LLC. ("Offshore LLC's")
- It is taxed like a partnership which has the benefit of flow-through taxation.
- Can be formed with any amount of members.
- An LLC does not pay taxes; its resident members are tax liable as personal income similar to a partnership. Non-resident members are liable for taxes on income derived from the US.
- Foreign members are not liable to tax and don't have to file tax forms if the income derived is not from the United States.
- The only document required to register your company, (company formation), with the local Secretary-of-State is the Articles of Organization.
- An LLC has a limited life span.
A US organized Limited Liability Company is a good vehicle for persons who conduct international business and wish to minimize their tax liability which is why they may be referred to as offshore LLCs.
The US Limited Liability Company allows Non-US resident full ownership and these members are not required to file any tax returns once the income of their LLC is not derived from the United States and it is not effectively connected with trade or business within the United States nor do they employ US residents or rely on a dedicated place of business within the United States. This does not apply to an office which is infrequently used.
A US LLC can be used in the same way an offshore business company registered in a Tax Haven may be used if you do not plan to trade with the United States.
We offer USA company incorporation of LLC's on both the east coast and west coast of the United States. We recommend Oregon on the west and Delaware on the east.