What is an LLC?

LLC stands for "limited liability company". In 1977, Wyoming became the first US state to pass laws authorizing LLCs. Since then, the states have all enacted various forms of LLC laws. Texas, in particular, has a great set of LLC laws; they are pro business, pro asset protection, and pro investing.

So what's the big deal with an LLC anyway?

They are less formal than a corporation and can be managed more like a partnership. There's no requirement for having a board of directors like there is in many corporations, although you can make an LLC have that structure if you so desire. LLCs also have more flexibility in choosing how they wish to taxed through check the box taxation. This means that flow-through taxation is usually a given. Depending on the state of formation, they may have stronger creditor protections due to limiting creditor remedies to charging orders. Texas also has wonderful LLC protections that many other states don't have. But that's another article.

What are their disadvantages?

The main one I see is that the tax code hasn't fully caught up to LLCs, particularly LLCs that choose to be taxed as partnerships. It's unclear whether the IRS will continue to allow passive members in an LLC to avoid paying SECA tax, whereas if the entity was formed as a limited partnership, there is no question that limited partners don't pay SECA tax except for guaranteed payments.

Further, sometimes an LLC's lack of formality can hurt a potential deal. Sometimes investors want the security of a limited partnership and don't mind the extra cost of a limited partnership.

They also typically aren't publically traded or taken public in their original form. But then again, neither are most other start up businesses. Publically traded companies have converted to being taxed as a C-corporation or other public-traded form that fits the applicable regulatory scheme.

A final downside is that private equity investors typically prefer to invest in entities taxed as C-Corps instead of partnerships as they don't want flow-through taxation. This can be remedied by having the private equity investors form a "blocker C-Corp" that then owns the partnership interest.

Big Picture

The LLC has become the entity of choice for most applications in TX and in the United States in general. They, along with limited partnerships, form the back-bone of Texas business structures.If you want to learn more, keep reading our articles. The Wikipedia article on LLCs is nice for a non-legal picture of LLCs.


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