James R. Kay, CPA

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What about a Limited Liability Company?

In recent years, a new business entity called the limited liability company (LLC) has emerged.  The LLC offers the same advantages of a corporation if the proper election is made when the LLC is formed.

The LLC has one added benefit.  Whereas state law requires a corporation to have a three-tiered organization that includes shareholders, directors and officers, an LLC can adopt a two-tiered organization with only mangers and owners.  This simplified organization means fewer required meetings.  If the required meetings of an organization are not held the organization could get into trouble when faced with a legal proceeding.  If you ignore the existence of your organization by not holding the required meetings, then the judge you face in court may ignore the existence of your organization and hold you (the owners) personally responsible.  This would defeat your corporate or LLC limited liability protection.

After you form your LLC, you can elect to be a corporation for federal tax purposes and then enjoy all of the benefits of a corporation.  You have to make this election within 75 days of forming your LLC to make it effective for the first year.

After making the election to be treated as a corporation for federal tax purposes, you can make a further election to be treated as an S-corporation.  Here again, this election must be made within 75 days of forming your LLC in order to make it effective for the first year.

Choosing the right form of organization can be a very simple choice for some businesses.  For others it can be very critical.  Many times it depends upon the type of assets you intend to put in the business.  I may depend upon the prospects of selling the business in the future for a substantial profit.  Franchise tax issues are also an over-riding concern.  You don't want to make the State of Texas a 4.5% partner in your business if you avoid it.

Please consult with your tax advisor for a critical analysis of your specific situation.

Caution - The discussion on this page is general in nature. It is not intended to be legal advice.  Always seek the advice of a tax professional and/or attorney when contemplating decisions of this nature.

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