From Michael’s interview for the Masters of Estates & Probate series on ReelLawyers.com.
Limited Liability Company
The limited liability company is formed by filing articles of organization with the Texas Secretary of State. Like the corporation, the limited liability company offers limited liability protection to its members, such that each member’s liability is limited to each member’s interest in the limited liability company. Consequently, if a liability accrues within the limited liability company, then the members’ personal assets will be protected from a judgment creditor of the limited liability company, provided that the company form was respected by the members and the courts.
Business Asset Protection
Perhaps the most important difference between the corporation and the limited liability company relates to business asset protection. In the event a judgment creditor of a member of a limited liability company seeks to satisfy such judgment with such member’s interest in a limited liability company, the creditor will obtain only the rights of an assignee. This assignee interest does not give a creditor voting rights nor does it give a creditor the power to force a distribution on such interest. As a result, the limited liability company and its assets are protected from the judgment creditors of its members.
Piercing the Company Veil
The same theories that apply to a corporation with regard to piercing the corporate veil likely apply to a limited liability company.
Like a corporation, in order for the company form to be respected by the courts, thereby shielding members from company liabilities, the members must adhere to the formalities of operating a limited liability company. The formalities associated with the limited liability company are similar to the formalities associated with a corporation, with one relatively important difference. If the limited liability company is taxed as a disregarded entity or partnership, minutes of annual and special meetings are unnecessary. However, most practitioners encourage business owners to conduct annual and special meetings even if they are not required.
With an limited liability company, it is possible to have several different structures for taxation. A breakdown is as follows:
By default, if a single person or entity forms a limited liability company, then the taxation of such limited liability company will be deemed to be disregarded and the limited liability company will be taxed as a sole proprietorship if the member of the limited liability company is an individual, or it will be taxed as a branch or division of the entity owner. This type of taxation results in all of the limited liability company’s income and expenses being reported on the individual or entity’s income tax return. While the limited liability company is a disregarded entity for tax purposes, it is not disregarded under state law, affording the members the benefits associated with limited liability.
By default, if two or more single persons or entities form a limited liability company, then the taxation of such limited liability company will be deemed to be a partnership and the limited liability company will be required to file a Form 1065 tax return.
A limited liability company, after formation, may elect to be taxed as a corporation by filing Form 8832 Entity Classification Election and checking the box choosing to be taxed as an association taxable as a corporation. As a result, net income earned by the limited liability company will be taxed inside the limited liability company at the lower corporate
tax rate. Like a corporation, a limited liability company making this election is required to file income tax Form 1120.
If the limited liability company files Form 8832, electing to be taxed as an association taxable as a corporation, and Form 2553, electing to be taxed under Subchapter S of the IRC, then the limited liability company will be taxed as a Subchapter S corporation. Like a Subchapter S corporation, the limited liability company making these elections is required to file income tax Form 1120S.
The limited liability company is frequently used by business owners, small or large, who seek limited liability protection along with business asset protection, in a simple or complex type of entity. In addition the limited liability company often serves as the general partner of limited partnerships.
Professional Limited Liability Company
The limited liability company will be deemed to be a professional limited liability company if the members file articles of organization which state that the company is a professional limited liability company formed for the purpose of rendering professional services by individuals licensed in any type of professional service which requires as a condition precedent to the rendering of such service the obtaining of a license, permit, or certificate. Examples of such professional service providers include: architects, attorneys, certified public accountants, dentists, public accountants, and veterinarians.