Limited Liability Company LLC

Limited Liability Company LLC

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The purpose of a Limited Liability Company/Corporation is to limit your exposure to an investment or "risk". In theory, your exposure is limited to your investment or involvement. There may be significant tax advantages as well as may be used to transfer assets for estate planning purposes. 

You should discuss this with your Tax Advisor and a Real Estate Attorney. Chances are, you will get several different answers dependent upon who you talk to.

DISADVANTAGES OF THE LLC  Many states, including Alabama, California, Kentucky, New Jersey, New York, Pennsylvania, Tennessee, and Texas, levy a franchise tax or capital values tax on LLCs. (Beginning in 2007, Texas has replaced its franchise tax with a "margin tax".) In essence, this franchise or business privilege tax is the "fee" the LLC pays the state for the benefit of limited liability. The franchise tax can be an amount based on revenue, an amount based on profits, or an amount based on the number of owners or the amount of capital employed in the state, or some combination of those factors, or simply a flat fee, as in Delaware. Effective in Texas for 2007 the franchise tax is replaced with the Texas Business Margin Tax. This is paid as - tax payable = revenues minus some expenses with an apportionment factor.

It may be more difficult to raise capital for an LLC, as investors may be more comfortable investing funds in the better-understood corporate form with a view toward an eventual IPO.

Although there is no public requirement for an operating agreement, members who operate without one may run into problems.

Some people, such as new business people, may not be familiar with the governance of LLCs. Unlike corporations, they are not required to have a board of directors or officers.

The principals of LLCs use many different titles -- e.g., member, manager, managing member, chief executive officer, president, partner -- some of which are not correct. As such, it can be difficult to determine who actually has the authority to enter into a contract on the LLC's behalf. Proof of authorization is helpful.

All income members receive is taxed at ordinary income rates and subject to FICA tax

SEE ALSO: ADVANTAGES OF THE LLC Books on forming LLC

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