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Information on LLC's

Problem to be solved

  • Reduce personal liability of owners for debts and acts of the company
  • Survive the death or illness of an individual owner
  • Split tax liability, loss, and gain between owners
  • Simplify taxes
  • Present a uniform business that the state and other businesses are familiar with
  • Reduce risk for insurance purposes

What is an LLC?

A limited liability company (LLC) is a relatively new business entity, at least in the United States. Its basic features are that its owners have limited liability for the entity's debts and obligations, similar to the status of shareholders in a corporation, and its income and losses are normally passed through to the owners as if it were a partnership. It is probably most like a limited partnership, without the requirement that there be at least one general partner liable for the debts and obligations of the partnership.

An LLC is a statutory creation. That is, unlike general partnerships which developed under common law, an LLC, like a corporation, is created by filing a document (usually called Articles of Organization) with an officer designated by state law.

Business entities that bear strong similarities to limited liability companies existed in some European countries, but the first modern LLC statute in the was adopted by the Wyoming LLC legislature in 1977. At first, the novel entity was slow to gain acceptance. The second state to enact a limited liability company act was Florida in 1982, five years after Wyoming's act. However, in the 1990's the popularity of the LLC snowballed and by 1997, every state and the District of Columbia had passed statutes allowing the formation of limited liability companies.


A limited liability company (LLC) has many advantages as a form of business entity:

  • Pass-through taxation - under the default tax classification, profits taxed at the member level, not at the LLC level (i.e., no double taxation).
  • Limited liability - the owners of the LLC, called "members," are protected from liability for acts and debts of the LLC.
  • With "check-the-box" taxation, an LLC can elect to be taxed as a sole proprietor, partnership, S-corp or corporation, providing much flexibility.
  • Can be set up with just one natural person involved or, in some states, one owner which may be an entity itself.
  • No requirement of an annual general meeting for shareholders (in some states, such as Tennessee and Minnesota, this statement is not correct).
  • No loss of power to a board of directors (although an operating agreement may provide for centralization of management power in a board or similar body).
  • LLCs are enduring legal business entities, with lives that extend beyond the illness or even death of their owners, thus avoiding problematic business termination or sole proprietor death.
  • Much less administrative paperwork and record keeping.
  • Membership interests of LLCs can be assigned, and the economic benefits of those interests can be separated and assigned, providing the assignee with the economic benefits of distributions of profits/losses (like a partnership), without transferring the title to the membership interest (e.g., see [| Virginia and Delaware LLC Acts]).


While a limited liability company (LLC) offers many advantages over other forms of business entity, there are also some disadvantages. Some of the drawbacks to selecting an LLC over another entity are:

  • Earnings of most members of an LLC are generally subject to self-employment tax. By contrast, earnings of an S corporation, after paying a reasonable salary to the shareholders working in the business, can be passed through as distributions of profits and are not subject to self-employment taxes.
  • Since an LLC is considered a partnership for Federal income tax purposes, if 50% or more of the capital and profit interests are sold or exchanged within a 12-month period, the LLC will terminate for federal tax purposes.
  • If more than 35% of losses can be allocated to nonmanagers, the limited liability company may lose its ability to use the cash method of accounting.
  • A limited liability company which is treated as a partnership cannot take advantage of incentive stock options, engage in tax-free reorganizations, or issue Section 1244 stock.
  • There is a lack of uniformity among limited liability company statutes. Businesses that operate in more than one state may not receive consistent treatment.
  • In order to be treated as a partnership, an LLC must have at least two members. An S corporation can have one shareholder. Although all states allow single member LLCs, the business is not permitted to elect partnership classification for federal tax purposes. The business files Schedule C as a sole proprietor unless it elects to file as a corporation.
  • Some states do not tax partnerships but do tax limited liability companies.
  • Minority discounts for estate planning purposes may be lower in a limited liability company than a corporation. Since LLCs are easier to dissolve, there is greater access to the business assets. Some experts believe that limited liability company discounts may only be 15% compared to 25% to 40% for a closely-held corporation.
  • Conversion of an existing business to limited liability company status could result in tax recognition on appreciated assets.

Questions and Answers

How would we do this?

  1. ATX Hackerspace is currently an LLC. No changes are required to continue with this business model.
  2. To attain the FOTSC goals of more member participation:
    1. we need to change our bylaws and possibly our original charter (currently equal to the bylaws, we don't have to file a charter in TX)
    2. determine a way to separate financial ownership/investment from voting rights (without harming the owners)
    3. open the LLC to investment
  3. ... more things here ...

Additional Information