Limited Liability Companies (LLC)

Theory Meets Reality

The Limited Liability Company is a relatively new animal on the business entity scene. It is the result of the recognition that corporations as they really existed and were operated in the real world did not often follow the legal fiction of the corporation.

The corporate legal structure had evolved over the centuries to suit large business enterprises that were operated with formality; however, most businesses today are relatively small and operate informally. As small businesspersons sought the advantages of the corporate entity they found the formalities of boards, shareholder meetings, and the like, to be unduly burdensome.

Eventually pressure built for the creation of a business entity that enjoyed the legal advantages of a corporation without the onerous duties imposed by traditional corporate law. In effect, small businesses wanted have their cakes and to eat them too (or sell them, as the case may be).

The Limited Liability company was born out of this overwhelming need to allow small businesses to prosper with minimal legal encumbrance. A Limited Liability company, as the title suggests, has limited liability much as a corporation has. However, the courts can not disregard this liability limit on the grounds that the business owners had operated the corporation as a “fiction” and “alter ego.” Thus, Limited Liability members (as shareholders are called in the LLC world) don’t have to place their personal fortunes at risk simply by failing to hold shareholder meetings and writing minutes, which are reasons why limited liability for corporate shareholders has been lost as a judge “pierced the corporate veil.”

The IRS has treated Limited Liability Companies with extraordinary generosity; allowing the member(s) to elect how the LLC will be taxed. The organizing member can pick whether to be taxed as an individual (sole proprietor); partnership (if there are at least 2 members); corporation or S corporation.