LLCs offer tax advantages.

• Author: Pflieger, Deborah
• Position: Limited liability companies

The choice of a business entity is one of the most important decisions a new enterprise will make. Two important considerations in this process are protection from legal liability for business debts and taxation of entity profits (or usability of business losses).

While corporations provide their shareholders greater liability protection than partnerships, the partnership form is more appealing from a tax standpoint, since partnerships are not subject to entity level taxation and partners can generally deduct partnership losses. Limited partnerships are used frequently to obtain the advantage of limited liability as well as the tax advantages associated with a partnership.

The limited liability company (LLC), a relatively new form of entity in the United States, blends the legal and tax benefits of partnerships and corporations. Many foreign countries have had entities similar to LLCs for years. An LLC is a hybrid business entity, possessing the organizational and operational characteristics of both a closely held corporation and a limited partnership. The popularity of LLCs has increased significantly in recent years; by the end of 1993, it is anticipated that over 30 states will have enacted legislation authorizing the formation of LLCs.

In general, an LLC is an unincorporated entity whose members and managers are not personally at risk for the liabilities of the entity. it is a legal entity with authority to conduct business in its own name; it must be formed by two or more members; and it must have a stated term of existence or duration, generally no more than 30 years in length. Interests in an LLC generally are not freely transferable. Management generally is in the hands of a manager or managers who are elected by the members.

Classification of an LLC as a corporation or a partnership for Federal tax purposes is dependent on the number of corporate characteristics the company possesses. If it has more than two corporate characteristics, it will be classified as a corporation; with two or fewer, it will be treated as a partnership. The corporate characteristics are: * Continuity of life. * Limited liability. * Free transferability of interests. * Centralization of management.

LLCs generally have been found by the IRS to lack continuity of life and free transferability of interests; see Rev. Rul. 88-76. Continuity of life generally is deemed to be lacking because, under most state statutes, an LLC is dissolved on the death, retirement...