OVERVIEW OF LIMITED LIABILITY ORGANIZATIONS

Corporations & Limited Liability Companies (LLCs) offer a way to pool capital without risking unrelated assets. Other business structures, such as partnerships, do not enjoy limited liability protection and members of these organizations might be personally liable for all of the organization’s debts and other obligations.

Over the years, various organizational forms have been created to limit exposure to investors, which in turn is thought to encourage business and investment activity. In theory, these entities are “fictitious persons” and, in many respects, enjoy similar protections as real persons.

Choosing the right business structure involves analysis of the objectives of the company, and often most importantly analysis of potential tax consequences by a competent expert.

“C” & “S” CORPORATIONS

Depending on how they wish to be treated under federal tax law, a corporation will be either a “C Corp.” or an  “S Corp.” — named for the sub-chapter in the U.S. tax law that regulates the entity’s taxation. A “C” Corporation pays corporate tax separately from its shareholders, then the shareholders pay tax on any distributions (often referred-to as “double taxation”). In an “S” Corporation, the corporate revenues “flow through” to the investors and the corporation does not pay a separate tax.

LLC’s, discussed below, can elect to be treated as an S corporation or as a C corporation by making an election on IRS form 8832.

Limited Liability Companies (LLCs)

An LLC is a newer form of business entity that offers advantages over corporations and partnerships. Unlike partnerships, the LLC’s  owners are not liable for any debts or obligations of the LLC beyond their financial investment but the members of the LLC can retain the right to participate in management of the LLC.

A limited liability company is similar  in many respects to a corporation, but LLC’s have greater operational freedom. The terminology used to describe the owners of an LLC is different from that used in the corporate world. Instead of corporate shareholders, LLCs have “members” and instead of a corporate directors, LLCs have “Managing Members.”

Most importantly, the members of an LLC, like the shareholders of a corporation, are not personally liable for the LLC’s obligations beyond their investment in the LLC.

Not-For-Profit / Non Profit / 501(c) Organizations

Nonprofit entities go by various names and often qualify for tax exempt status. They can be organized in various forms but their “not for profit” nature can give them tax exemption if they qualify.