Limited Liability Company Basics

In recent years, limited liability companies, or LLCs as they are frequently known, have become one of the most popular ways for investors to structure their holdings, beating out the formerly more popular limited partnership. From families pooling their money together to Fortune 500 corporations that have subsidiaries, you may have directly or indirectly invested in an LLC without knowing it. This overview was designed to help you understand what LLCs are, why investors use them, and some of the factors you may want to take into consideration before you form an LLC or invest in one.  (Click here to see all Northern Michigan Waterfront Lifestyle Homes for Sale)

A limited liability company is a special legal structure that combines the benefits of a corporation and a partnership. Some of these benefits and advantages might include:

• Taxation: An LLC can elect for either corporate-level taxation or pass-through taxation. That is, you can decide to have the company pay taxes on its earnings as a regular stock corporation would, or you can have it prepare K-1 statements for each investor showing their portion of the profits and losses, which they then declare on their personal income tax filings.
  
  
• Member vs. Manager Operation: Instead of shareholders, LLCs have what are known as “members”. An LLC can be either “member-managed” or “manager-managed”. In a member-managed limited liability company, all owners have a say in day-to-day decisions. In a manager-managed limited liability company, the members elect managers to run the business and these managers handle the daily work, often for salary and wages.
  
  
• Tremendous Flexibility for Profit and Loss Allocation: Profits and losses can be divided virtually in any way that is compatible with tax law, unlike with a corporation where everything has to be divided pro-rata. If you and your family formed an LLC to start a restaurant, you could write the contract that governed the business (known as the “operating agreement”) to meet your needs no matter how complex. (Click here to see Northern Michigan's finest collection of vacation rentals
  
  
• Limited Liability for All Investors, Including Managers: Unlike a limited partnership, where the managers, or general partners, have personal liability for the business debts and liabilities, in a limited liability company, no one is personally on the hook unless they agree to be in a contract, such as a commercial bank loan that requires a personal guarantee from any owner of more than 20% of the LLC equity.