A Primer – Limited Liability Companies
On October 24, 1994, legislation establishing limited liability companies (“LLC”) and limited liability partnerships (“LLP”) in New York became effective.
Limited Liability Companies are becoming the prevalent form of business entities for “small” businesses due to important advantages over existing business organizations, especially for entrepreneurial businesses with a small number of active investors such as medical and other professional partnerships and, conversely for passive investments, such as real estate investments, venture capital projects, and theatrical investments.
Limited Liability Companies
An LLC is a statutory form of organization which combines the beneficial federal tax status (i.e., no double-level tax) and the flexibility of a partnership with the limited liability afforded to shareholders of a corporation or limited partners of a limited partnership.
An LLC offers significant advantages over “S” corporations and general or limited partnerships. For example, an LLC, unlike an “S” corporation, does not have the stringent qualifications which are imposed on “S” corporations such as restrictions on the number or type of shareholders or classes of stock. An LLC also allows more flexibility in allocating income and losses among its members than does an “S” corporation.
An LLC also compares favorably to (i) a general partnership where all the partners are personally liable for partnership debts and obligations and (ii) a limited partnership where the general partner (and any limited partners involved in management) are personally liable for partnership debts, since no members of an LLC have any personal liability regardless of his or her participation in management.
Limited Liability Partnerships
The statute also authorizes the formation of LLPs which, however, are limited to use by professionals including, but not limited to, physicians, attorneys, accountants, engineers, architects, pharmacists, dentists, veterinarians, and optometrists. In sum, an LLP protects each partner’s personal assets from the negligence or wrongful conduct committed by other partners of the LLP. Accordingly, in an LLP, the partnership’s assets and the personal assets of the negligent partner will be available to the injured party but the personal assets of the other partners will not be available.
Existing Business Organizations
With the availability of LLCs and LLPs, many existing business organizations are exploring the advantages of converting from their existing form to an LLC or LLP. Given their flexible nature, LLCs are particularly well-suited for businesses with a small number of active investors. Additionally, LLCs may be a better form of organization for family businesses that desire to maintain control within the family.
Conclusion
Whether an existing business organization, a start-up business, or in connection with estate planning, limited liability companies provide many of our clients with an opportunity to enhance their ability to conduct their business with added protection from liability, more favorable tax consequences, and greater flexibility to structure the business organization.
The foregoing only briefly outlines certain highlights of LLCs. If you have any questions or we can be of any service, we would be happy to discuss these matters with you.