LLCs have now been adopted in practically every state. Many business incorporation services did not provide LLC service. .Limited Liability Companies (LLCs) were introduced in the late 80’s and early 90’s and do not have the long, established history of corporations. LLCs were originally limited to two or more persons and with a limited life. Most jurisdictions have eliminated those limitations.

LLCs were intended to plug some gaps that were left unintentionally after the Tax Reform Act of 1984. Essentially, the taxation rules governing partnerships were thought to be more favorable than other tax treatment for real estate ventures, equipment leasing and certain other businesses where passive income and depreciable assets were involved. Unfortunately, partnerships were wide open to liability and could not afford the (general) partners any liability shield whatsoever.

Operating Agreements can be drawn so that the management and, to some extent, taxation can be manipulated in ways favorable to the company. Many states now permit Limited Liability Companies that combine the liability shield of corporations with the tax treatment of partnerships. Our online incorporation services include a time tested operating agreement at no additional charge.

As a result, LLCs are often preferred for real estate syndications, equipment leasing, holding companies, and businesses that will derive their principal income from passive investments. LLCs are also commonly used by owners that would prefer S corp status but cannot qualify for some reason.

There are some disadvantages to the LLC to the small business person. LLCs have become a favorite for consultants and people that would operate as sole proprietors, but require the liability shield. Typically, the earnings are subject to social security and medicare taxes.These can be avoided to some extent by selecting S corporation tax treatment for the LLC. Some employee benefits, such as flexible compensation plans, will be restricted. LLCs are unwieldy vehicles for capital formation except in real estate, equipment leases and tax shelter investments. Some states still limit LLCs to two or more members, limited lives, and provide for dissolution upon withdrawal of a member. Since LLCs are still relatively new, there is not a great body of decided cases to determine how different states may interpret the LLC rules.