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The LLC is a newer entity that combines the flow-through taxation of a partnership with the limited liability aspects of a corporation. Like an S corporation, LLCs offer flow-through taxation. They also offer superior asset protection benefits.

LLCs are chartered with the state and thus provide limited liability to the owners (known as “members”). Like a corporation, members are protected from personal liability for business debts or legal claims against the business (unless, as with any other entity, they sign a personal guarantee). And, as in a corporate structure, members must remember to sign contracts and obligations as members of the company rather than putting themselves at risk by signing individually.

LLCs allow for flexible management. Either the members (owners) or the managers (the president, etc.) can run the company. They also offer flexibility in division of profits and losses. In a corporation, dividends are allocated according to percentage ownership. In an LLC, members can utilize special allocations to divide profits between members. So, for example, profits in an LLC owned 50/50 can be allocated on a 70/30 basis.

With an LLC, Articles of Organization are filed with the Secretary of State. Instead of bylaws, an operating agreement is created. As with a corporation, to avoid personal liability in an LLC you must:

• Maintain timely filings with the state.

• Prepare entity tax returns.

• Maintain a separate bank account for the business.

• Separate personal and business matters.

• Have adequate capitalization (funding) of the business.

• Hold annual meetings of managers and members.

From being brand new in the 1980’s, LLCs are now one of the most popular ways to do business and hold real estate.