Limited Liability Companies (LLCs)
Advantages of LLCs A limited liability company (LLC) is seen as “combining the most advantageous features of partnerships and corporations” (Kubasek, Browne, Herron, Dhooge, Barkacs, 2015b, p. 266). Perhaps the most significant aspect is the variety of choices the LLC has upon its inception which are included in the operating agreement. “[T]he enormous flexibility and contractual nature of the LLC may provide advantages such as clearly negotiated and defined fiduciary duties and only the desired formalities” (Chrisman, 2010, p. 485). The LLC, by default, offers the limited liability that is extended to limited partnerships and corporations. However, one of the first selections to be made is how the LLC will …show more content…
Under a member-managed arrangement, “all members have the apparent authority to contract on behalf of the LLC” (Schwidetzky, 2009, p. 790). This also permits every member to participate in operation and management decisions. On the other hand, the LLC may elect to be manager-managed which “is substantially similar to the LLP” (Hurt, 2015, pp. 605-606) and limits the involvement on the non-manager members. An important benefit of a limited liability company, that is not present in any of the partnerships, is the potential for the perpetual life of the business. The members in the LLC can specify in the operating agreement the conditions under which a new member can be added. This would provide the opportunity for the LLC to maintain operations by including additional members who will conduct business similar to the original members. Alex, Bill, Carl, Devon, and Xavier would have numerous decisions to make regarding the farm operations. They are able to establish the LLC to be taxed as a partnership which would allow them to allocate the profits and losses to their personal taxes. By contrast, taxation as a corporation would permit the five members to receive a salary and leave some profits in …show more content…
Both corporations offer limited liability to their shareholders, or owners, comparable to that of other limited liability forms of business organization. The shareholders of the S-Corp and the C-Corp have the ability to freely transfer their shares and, since a corporation is considered a separate entity, it has the potential for endless existence. As such, the dissociation of shareholders does not affect the continuation of the corporation. Aside from these similarities, the tax regime differs between the two. The S-Corp holds the tax status of a partnership with the distributed income being taxed at the personal rate of the shareholder and the losses being applied to the personal income. Since not all profit is income to shareholders and some is kept in the business, this “allows the opportunity to avoid significant self-employment taxes as opposed to entities taxed as sole proprietorships or partnerships” (Chrisman, 2010, p. 488). The earnings retained by the corporation may be taxed then at a lower corporate tax rate. The C-Corp is taxed differently and will be discussed later on. Organizing the farm operations as a corporation would result in Alex, Bill, Carl, Devon, and Xavier having their liability limited to the amount they have invested in the business. As a corporation, any of the five could sell part, or all, of their shares to others
Advantages of LLCs A limited liability company (LLC) is seen as “combining the most advantageous features of partnerships and corporations” (Kubasek, Browne, Herron, Dhooge, Barkacs, 2015b, p. 266). Perhaps the most significant aspect is the variety of choices the LLC has upon its inception which are included in the operating agreement. “[T]he enormous flexibility and contractual nature of the LLC may provide advantages such as clearly negotiated and defined fiduciary duties and only the desired formalities” (Chrisman, 2010, p. 485). The LLC, by default, offers the limited liability that is extended to limited partnerships and corporations. However, one of the first selections to be made is how the LLC will …show more content…
Under a member-managed arrangement, “all members have the apparent authority to contract on behalf of the LLC” (Schwidetzky, 2009, p. 790). This also permits every member to participate in operation and management decisions. On the other hand, the LLC may elect to be manager-managed which “is substantially similar to the LLP” (Hurt, 2015, pp. 605-606) and limits the involvement on the non-manager members. An important benefit of a limited liability company, that is not present in any of the partnerships, is the potential for the perpetual life of the business. The members in the LLC can specify in the operating agreement the conditions under which a new member can be added. This would provide the opportunity for the LLC to maintain operations by including additional members who will conduct business similar to the original members. Alex, Bill, Carl, Devon, and Xavier would have numerous decisions to make regarding the farm operations. They are able to establish the LLC to be taxed as a partnership which would allow them to allocate the profits and losses to their personal taxes. By contrast, taxation as a corporation would permit the five members to receive a salary and leave some profits in …show more content…
Both corporations offer limited liability to their shareholders, or owners, comparable to that of other limited liability forms of business organization. The shareholders of the S-Corp and the C-Corp have the ability to freely transfer their shares and, since a corporation is considered a separate entity, it has the potential for endless existence. As such, the dissociation of shareholders does not affect the continuation of the corporation. Aside from these similarities, the tax regime differs between the two. The S-Corp holds the tax status of a partnership with the distributed income being taxed at the personal rate of the shareholder and the losses being applied to the personal income. Since not all profit is income to shareholders and some is kept in the business, this “allows the opportunity to avoid significant self-employment taxes as opposed to entities taxed as sole proprietorships or partnerships” (Chrisman, 2010, p. 488). The earnings retained by the corporation may be taxed then at a lower corporate tax rate. The C-Corp is taxed differently and will be discussed later on. Organizing the farm operations as a corporation would result in Alex, Bill, Carl, Devon, and Xavier having their liability limited to the amount they have invested in the business. As a corporation, any of the five could sell part, or all, of their shares to others