| 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.
- All income members receive is taxed at ordinary income
rates and subject to FICA
tax
SEE ALSO: ADVANTAGES
OF THE LLC
See Also: Books
on forming LLC
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Every