The Limited Liability Company - An Overview

What is a Limited Liability Company ("LLC") ?

An LLC is a new form of business entity which, in a hybrid combination, affords limited liability to its owners (or "Members") with the tax attributes and flexibility of a partnership. Adopting a corporate standard, no Member is liable for the debts or obligations of the LLC. Adopting a partnership standard for tax purposes, there is only one level of federal income tax. Like partners in a partnership, LLC Members are subject to federal income tax, and there is no federal income tax applied at the entity level. Functionally, for operational purposes, the LLC may be crafted in form like a general partnership.

Why choose an LLC?

LLC advantages over a "C" Corporation:
• No double-tax because no LLC level tax.

• Ability to specially allocate profits and losses (subject to IRC Sec. 704 (b)).

• No double-tax on liquidation, no double-tax on non-liquidating or liquidating distributions.

• Transfer of appreciated property to a corporation (C or S) results in no gain provided that the transferors are "in control" of the corporation immediately following the transfer. There is no "control" requirement with respect to transfers of appreciated property to an LLC.

• Transfer of encumbered property where debt assumed by the corporation (C or S) is greater than the adjusted basis of the property is treated as "boot" and is recognized as income to the transferor upon the transfer. Generally, a similar transer of encumberecd property to an LLC will not result in a taxable event, except to the extent that a decrease in a member's share of liabilities exceeds the member's adjusted basis in the membership interest.

• "Inside basis." When shares of corporation (C or S) change hands by means of sale, exchange, death or otherwise, there is generally no change in the "inside basis" of assets owned by such corporation. That is, there is no step-up to reflect the difference between the fair marked value of assets and their tax basis to the entity.

However, if an LLC makes a timely election under IRC Sec.754 following (1) the transfer of assets in a sale or exchange or by death, or (2) the distribution of property to a member, then the difference between the fair market value of LLC assets and the adjusted basis of such assets in the hands of the LLC may be taken into account in determining (a) the income and loss allocable to the transferee member (following a sale, exchange or death) or (b) the entity level income or loss (following a distribution of property) .

• An LLC is not subject to the alternative minimum tax under IRC Sec. 55(a).

• An LLC is not subject to the accumulated earnings tax under IRC Sec. 531-537.

• An LLC is not subject to the personal holding company tax under IRC Sec. 541-547