Forming a Limited Liability Company to Organize Your Business

LLC - Jigsaw Puzzle with Missing Pieces.Limited liability companies have mostly taken over the space that partnerships used to occupy. Here are a few things you should know:

  • An owner of a limited liability company is called a member.
  • Members of a limited liability company can either run the company directly, like in a general partnership, or appoint “managers” to be responsible for day-to-day operations. A manager of a limited liability company can either be like a director, with supervisory authority, or an officer, with day-to-day responsibilities. It depends on what the members want.
  • Limited liability companies can be taxed like partnerships, where items of net income and net loss are passed through to the members. This means that tax items can be “allocated” to members differently from the cash they actually receive. One common example is if the limited liability company holds on to cash it earned to invest in its operations, to pay future bills or just as a reserve: the members still have to pay tax on it. The advantage is that the total tax bill is less than in a corporation, since there is no separate corporate tax.
  • Limited liability companies can also be taxed like corporations, so the entity pays a tax and then the members only pay tax on what they receive, like a corporate dividend. This is an advantage sometimes if the owners have a regulatory block on receiving certain types of income that might otherwise pass through the LLC. For small entities that can manage their cash flow to treat owner compensation as salary rather than distributions, it can have further advantages.
  • Like partnerships, limited liability companies give the members tremendous flexibility in how to structure tax allocations, cash distributions, rights to control the business and restrictions on transferring interests.
  • Limited liability companies are creatures of statute. They require a filing with the state to create.
  • Just as partnerships have a partnership agreement, limited liability companies have limited liability company operating agreements. These important documents have much detail to help guide the direction and operation of the company. The versions provided by online entity formation companies often do not meet parties’ specific needs.

Limited liability companies are more complicated to set up than corporations, but in the right circumstances they offer huge advantages. A limited liability company lawyer in Massachusetts can help.