From the Blog

April 16, 2012

The Amazingly Flexible Limited Liability Company

Written by: Peterson & Myers, P.A.

Since the IRS first allowed limited liability companies to be taxed as partnerships in 1988, business lawyers and their clients have marveled at the planning flexibility allowed by these entities. LLCs have become the go-to, start up entity of choice, providing an entity-level liability shield comparable to that of a corporation, while also allowing its members to be taxed as either a corporation or (usually more advantageously) a partnership under federal and state tax laws. The LLC creates a company with a legal existence separate from its members and eliminates the joint and several liability amongst its owners that vexes the partnership form. Like an S-corporation, no taxes are assessed at the entity level, but the LLC remains free of numerous rules that govern the formation and operation of those corporations. Florida has a modern LLC statute that addresses numerous issues arising for both small and large enterprises.

Most advantageously, the LLC allows the start-up entrepreneur to proceed without really knowing where he or she is going. For example, suppose I have an idea to sell supplies to people who want to survive a Zombie apocalypse. In the beginning, it’s just me, an idea, and a little money. I don’t know if I can bootstrap it myself into a billion dollar company, or if I will need to take on additional investors. I can form an LLC (let’s call it “Zombie Horde, LLC”) with just a single-member, but know in advance that I can take on additional members in the future, whether they are individuals, corporations or other business entities. I can also allow membership interests to be owned by 401(k) or IRA trustees, which trustees control much of this country’s individual wealth, and which trustees could not own stock in an S-corporation. Additionally, I can provide for different forms of membership interests. One investor might want current returns on her money, and I can provide for a class of membership interests that pays that return. Others may be looking more toward my long-term success, and I can craft a class of interests that allow for advantages to those investors if I later go public. Under partnership tax rules that allow a great deal of flexibility, I can even allocate tax income and losses disproportionately amongst the investor classes, allowing certain investors that can, say, take advantage of tax losses that may accrue in the beginning to get the full benefit of those losses. I can also be comfortable that as the business grows, I can convert the LLC, under Florida’s statutes or those of other states, into other business entity forms, or to merge the LLC into those entities. Finally, I can choose an entity-governance format that can allow me to either keep control of the entire enterprise, or share that responsibility with one or more other members. If my business plan works, Zombie Horde, LLC can run, not stagger, into a lucrative future.

The essence of the LLC format is the co-existence of an advantageous tax-status with a corporate-like limited liability. The LLC can also play an important role in estate planning for high-worth individuals. But its real genius is the flexibility it allows the start-up business.