Limited Liability Companies (LLC)

A limited liability company (LLC) is a hybrid form of business organization that combines the best aspects of both a corporation and a partnership. It provides its owners (called “members”) with corporate-style limited personal liability and the federal-tax treatment of a partnership. Especially well suited for small and medium-sized firms, it has fewer restrictions and greater flexibility than an older hybrid business form. In India this type of companies are called Private limited companies or ‘Pvt. Ltd.’ companies in short.

Until 1990 only two states, Wyoming and Florida, allowed the formation of LLC. A 1988 internal Revenue service (IRS) ruling that any Wyoming LLC would be treated as a partnership for federal-tax purposes opened the floodgates for the remaining states to start enacting LLC statutes. Though new to the United States, LLC have been a long-accepted form of business organization in Europe and Latin America and as mentioned above in India as well.

Limited liability companies generally possess no more than two of the following four (desirable) standard corporate characteristics: (1) limited liability, (2) centralized management, (3) unlimited life, and (4) the ability to transfer ownership interest without prior consent of the other owners. LLC (by definition) have limited liability. Thus, members are not personally liable for any debts that may be incurred by the LLC.

Most LLC choose to maintain some type of centralized management structure. One drawback to an LLC, however, is that it generally lacks the corporate feature of “unlimited life”, although most states do allow an LLC to continue if a member’s ownership interest is transferred or terminated. Another drawback is that complete transfer of an ownership interest is usually subject to the approval of al least a majority of the other LLC members.

Although the LLC structure is applicable to most businesses, service providing professionals in many states who want to form an LLC must resort to a parallel structure. In those states, accountants, lawyers, doctors, and other professionals are allowed to form a professional LLC (PLLC) or limited liability partnership

(LLP), a PLLC look-alike. One indication of the popularity of the PLLC/LLP structure among professionals can be found in the fact that all of the “Big Five” accounting firms in the United States are LLP.

Most business decisions are affected either directly or indirectly by taxes. Through their taxing power, federal, state, and local government have a profound influence on the behavior of businesses and their owners. What might prove to be an outstanding business decision in the absence of taxes may prove to be very inferior with taxes (and sometimes, vice versa).