Why an LLC?

Why an LLC?
The LLC is a relatively new idea, barely 40 years old and in many states more recently adopted. Different states charge different filing fees and each state has its own application, usually available on line and can be processed on line with a credit card. It frequently helps to get your EIN  ( employee identification number) number from the Federal Government first which has no fee and can also be done on line.

I actually find accountants and lawyers who ‘do not trust it, its too new’ they says and have on more then a few occasions resisted its use.
I however tend to gravitate to the LLC for a few reasons which work well for my strategies in implementing debt workouts.

Perhaps the most important aspect to me is its flexibility, an attribute not fund in other forms of organization. In an LLC profits and losses do not have to be shared as a direct function of ones ownership interest in the organization. A member, ( like a stock holder in a c or s corp,) can own 90%, yet receive only 50 % of the profit distributions and 25 % of the loss distributions. The point being that distribution is a separate agreement and is not fixed by the basic interest the person has in the business.

Thus an ‘owner ‘,  member,  who has a highly taxed outside income can achieve greater  tax benefits  from the LLC by receiving a larger distribution of losses then a member who has a lower taxable income and cannot use the losses as effectively, thus a disproportionate distribution of losses can be agreed to.

Likewise it is possible to cut up profit distributions disproportionate to the innate ownership split between member owners. This can only be achieved in an LLC.

Another use of this flexibility is to resolve the frequent issue of what happens if there is a disagreement and the owners are 50/50 partners… disaster.

Frequently ownership and distributions  rights can be held at 50% each but management decision making can be skewed so one of the partners has the ability to break a deadlock. This has served as a great way to placate ego as people tend to have an easier time giving up control if the profit distribution is equal.

Since there is frequently a managing director or organizing director whose job is limited in scope and nature, within the operational agreement it is possible to vest decision making authority in either the manager or the members, thus control of the company can shift dramatically at the discretion of the owners.

Adding and subtraction members is also quite simple. This makes for an easy change over when the time is right.

There is also the right to elect to  be taxed as a partnership while maintaining the protective shield against liability. This can be a valuable provision.

While it is true that pass through tax provisions similar to partnership taxation can be accomplished through an S corp. election, much of the above mentioned flexibility cannot.

The only drawback I see with an LLC  is the reality that all profit will pass through resulting in self employment taxes where in an s-corp some may be handled as a dividend distribution without self employment taxes.

Think about it, ask your accountant or lawyer and review the benefits and possibilities of using an LLC for your business organization and structure.