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Limited Liability Companies
Many individuals are familiar with the term "LLC," but may not be fully aware of what an LLC is and what it can accomplish.
Limited Liability Companies ("LLC") are entities created by statute in all of the 50 states. If properly formed, the owners of an LLC, like shareholders in a corporation will not be personally liable for the obligations of the LLC.
In Illinois, an organization must file Articles of Organization with the Illinois Secretary of State's office to properly establish an LLC. Owners of LLCs are referred to as "members" and those persons managing the LLC are "managing members." Some jurisdictions allow one person or entity to be the sole member; Illinois requires at least two members to form an LLC.
Unlike partnerships that are governed by partnership agreements and/or by by-laws, LLCs have "operating agreements." Although written operating agreements are not required for the operation of an LLC, they are recommended. Matters not addressed by the Articles of Organization or an operating agreement are governed by the default rules in the applicable state statute and these rules are not always beneficial for the particular business operating as the LLC.
Before creating an LLC, the persons forming the business should carefully weigh the benefits of the Limited Liability Company against C corporations, S corporations, limited liability partnerships and general partnerships.
The strongest advantages to an LLC offers are the tremendous flexibility in structure (as set forth in an operating agreement) that is protected by statute; the limited liability protection for members against third parties; and the treatment as a partnership for federal income tax purposes. An LLC also allows the members, when establishing the agreement, to vary their economic treatment and to offer different voting rights.
LLCs also are frequently suggested for use with estate planning and then are referred to as "family LLCs." The primary objective in this type of LLC is the ability to transfer tax valuation discounts. However, the future of this type of LLC is in question, as there are a number of indicators that show the Internal Revenue Service preparing to attack such valuation discount planning.
Considering the many variables involved in forming a business, we suggest that you contact your attorney to discuss the best form of business entity for you and your business.