Basic Aspects of Limited Liability Companies

Limited liability companies are probably the most flexible of the corporate entities discussed in this blog.  Limited liability companies are a form of “pass through” entity, which means that the entity itself does not pay taxes and that all profits and losses pass directly to each member of the company.  Losses also pass through directly to each of the members of the LLC in proportion to their percentage share of the LLC.  This is great because the LLC avoids the dreaded “double tax” treatment that applies to “C” corporations.  However, there are complicated tax rules that apply to LLC’s and you’ll need to keep your accountant on the horn so that you comply fully with all of these rules and don’t blow the pass through status of your entity. 

There are some other drawbacks to LLCs as well.  The first is that venture capital funds have a strong preference against investing in LLCs, and so if you company gets to this stage, you will likely have to convert to a “C” corporation (which in itself is not a very complicated maneuver and can be done rather quickly).  From the point of view of compensating employees with equity in the company, you generally cannot grant incentive stock options to employees of an LLC (see the discussion on incentive stock options in the “C” corporation section).

Advertisement