Introduction to Business Entities (Part 3)

Earlier posts analyzed several forms that businesses can take, including sole proprietorships, partnerships, and corporations.  This post looks at the most recently authorized form of business, the Limited Liability Company, or LLC.  While only available in Illinois for approximately the past 20 years, LLCs are the favored form of business for many small companies, as detailed below.

A limited liability company is an association whose characteristics are a combination of those of a corporation and a partnership. Unlike a partnership, an LLC is a separate legal entity from its owners. The owners are called members and have limited liability in that they are not liable for anything greater than their personal investment in the company. Members are not personally liable for the torts other members commit or any debts or obligations of the LLC.

Limited liability companies may be member-managed or manager-managed. The form of control is set forth in Articles of Organization which must be filed with the Illinois Secretary of State to establish the company.  No further documentation is required to form an LLC, but it is advisable to have an operating agreement, which provides details on the management and operations of the company. In a member-managed LLC, one or more of the owners will run the company. In a manager-managed LLC, the members appoint managers who will run the day-to-day operations of the company.

An additional advantage of an LLC is the flexibility it provides regarding taxation. Members generally elect “pass through” tax treatment (akin to a sole proprietor), thus eliminating any potential “double taxation” problems that corporations encounter.  Members can, however, choose to be taxed as a corporation in situations where that would be beneficial.

The flexibility LLCs provide their owners, the tax benefits, and the simplicity in establishing and running them are major benefits to this structure.  There are instances, however, when a corporate form is a better option and will be discussed in future posts.

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