Common Question About LLC's

The limited liability company is a popular business entity for small businesses. Here are some common questions and answers regarding the entity.

LLC stands for limited liability company. The entity was first created in Wyoming in the late 1970s, but now is available in all states. The LLC is touted as being a great business entity for small businesses because it provides the protection of a corporation without the formalities. It also offers the possibility of being taxes like a partnership, although there are some limits on this option in certain situations.

Before getting into common questions and answers regarding the LLC, it is important to point out that the rules governing the entity are primarily state laws. While tax issues are the same across the board for the most part because of our friends at the IRS, there is no national legislation regarding how LLCs are set up, governed and so on. Instead, the states set for the law. As you might imagine, California law differs from Delaware law which differs from New York law and so on. That being said, following are some common questions that come up.

Can an LLC be owned by one person? In a vast majority of states, one person can own an LLC outright. This simple answer, however, leads us to a secondary problem. An LLC owned by one person, known as a “member”, cannot be taxed as a partnership. Why? It takes two people to have a partnership. If there is only one owner, the IRS requires him or her to file taxes as though the LLC is a sole proprietorship. This means you must pay the 15.3 percent self-employment tax.

How Do LLCs and S-Corporations differ? For many small businesses, this is the ultimate issue when determining a business entity. In general, S-corporations have restrictions on the number of shareholders with a cap being set at no more than 75 shareholders. An S-corporation is also required to follow corporate formalities, to wit, having meetings and such. On the positive side, an S-corporation usually offers a better tax situation than an LLC. Why? Members of an LLC must pay social security and Medicare taxes on all distributions. Shareholders in an S-corp must only do so for their reasonable salaries. Any profit need not include the payment of such tax.

Does an LLC have to hold annual meetings? The answer depends upon the laws in your state and the operating agreement for the LLC. Generally, there is no such requirement. If this is the case in your state, however, you should still hold a meeting at least once a year. Why? If the LLC is sued, you want to show that it was run like a business and an annual meeting is a good way of doing that. A corporate book that has not been touched since the LLC was created never looks good.

As you can imagine, there are many other issues that arise when it comes to LLCs. That being said, these are a few of the common ones that should be addressed and often are not.