Basic Considerations in Forming a Limited Liability Company

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Basic Considerations in Forming a Limited Liability Company
by Celeste Marchand

If you are considering setting up your business as a limited liability company (LLC), you may be attracted by the idea of limiting your personal liability as you would with a corporation while being taxed as a partnership. However, you need to make sure that your LLC is set up properly so that it accomplishes your objectives. Otherwise, you might end up with the limited liability, but not get the partnership tax status.

Many state's LLC laws are written to allow maximum flexibility to the business owners. For example, the laws may allow for either perpetual existence of the business or existence of a limited duration. They may allow an LLC to be formed by only one person rather than by two or more people. The law may allow for either management by all of the members or for centralized management by member managers.

This flexibility can be an asset to business owners, but it can also lead to problems. In order for an LLC to be taxed as a partnership, it needs to be more like a partnership than a corporation. IRS regulations specify what characteristics indicate a partnership and how many must be present for a business to be considered a partnership. If you are not aware of all the requirements, you may inadvertently make your business look more like a corporation in the eyes of the IRS. For example, a partnership does not have perpetual existence – a corporation does. Also, an individual cannot own a partnership, but a corporation can. In a partnership, all of the partners have a right of management. In a corporation, management is centralized in the officers and board of directors.

If you only consider the state's laws in setting up your limited liability company, it is quite possible that it will be considered a corporation for purposes of tax law. The state statute may say that the existence of an LLC may be perpetual or its duration may be limited. However, it may be absolutely necessary to limit the duration of the limited liability company's existence, in order to qualify as a partnership under tax law. Because of this, it is a smart move to hire an attorney who practices business law to help you set up your limited liability company. He or she can help you determine which aspects of your business should resemble a corporation and which must resemble a partnership and make sure that your LLC complies with IRS regulations.