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Limited Liability Companies (LLCs)

A brief overview.

An LLC is a legal person.  So is a corporation.  An estate is not a legal person; the executor is the legal person who operates an estate.  The estate itself is the relationship between the property held by the executor (what the decedent died owning) and the beneficiaries or heirs if the decedent died without a will.

A corporation can sue and be sued.  Same for an LLC.

A corporation has Articles of incorporation and bylaws.   An LLC does not.

An LLC has to have an operating agreement.  A corporation does not.

The shareholders (stockholders) of a corporation are the owners.  The stock certificates issued to them state how many shares they own and, unless restricted, are freely transferrable.  An LLC is owned by its member(s).  That membership has two facets.  One is the right to vote.  The other is the right to distributions (income or profits and liquidating, if ever it is liquidated).  The property interest in an LLC is now defined in the LLC statute as a “transferrable interest.”  But that may be misleading, because it depends on what the operating agreement says about whether or not the other members have the right to refuse to admit a new member.

A corporation generally is taxed for income tax purposes under Subchapter “C” of the federal income tax law.  However, it can elect to be taxed under Subchapter “S.”

Under Subchapter “C” income tax has to be paid at the corporate level if the company makes a new profit; and it cannot deduct money paid as dividends to the shareholders.  They, in turn, have to report those dividends as income on their individual income tax returns.  For this reason, the profits of a “C” corporation are said to be subject to “double taxation.”  Corporations which have elected to be taxed under subchapter “S” and LLCs who elect to be taxed as a partnership can eliminate this so-called “double taxation.”

The board of directors of a corporation are entitled to set policies and hire and fire the officers.  The board of directors must be elected by the shareholders.  The officers are elected by the BOD.  An LLC is not required to have a BOD or officers.  Who runs it depends on what is agreed upon in the operating agreement.  The members can delegate authority to a manager if they choose to; or they can keep the power to make some or all of the important decisions themselves.  There is no fixed rule.

This page was written on 11233.

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