The New and Improved Entity Choice: the Limited Liability Company
While the corporation can trace its history back hundreds of years (in varying amounts, depending on the source of your research), the limited liability company (LLC) is a fairly recent invention, first appearing a few decades ago. Designed by lawmakers to be an alternative to the archaic corporation, lawmakers made the legal structure of the LLC to be flexible, deferring largely to the concept of freedom of contract. This principle, which is codified in the North Carolina Limited Liability Act, essentially recognizes the ability of two or more persons to decide for themselves on the organizational and operational aspects of the company, as opposed to the corporate model which relies much more on statute: with the corporation, owners must hold annual meetings, keep minutes and records, and comply with other statutory formalities that are not imposed upon the LLC.
For this reason, the LLC is often considered the entity of choice for small business owners. The flexibility and broad ability to agree amongst the owners on terms and structure allow for adaptable implementation of the LLC structure for a wide array of industries and business models. By utilizing a comprehensive owners agreement, or the Operating Agreement, the LLC can be structured largely as the owners see fit (subject to certain exceptions).
As with a corporation, it is formed by filing the charter documents with the North Carolina Secretary of State and offers the owners limited liability protection, with the default rule being that the owners are not ordinarily liable for the debts and wrongs of the company. This rule is subject to exceptions, of course, but the limited liability protection is one of the main reasons to form an LLC (or a corporation). The LLC also offers flexible tax options and strategies, under which the owner can utilize the default pass-through taxation structure or elect to be taxed as an s-corporation or c-corporation, thereby utilizing the flexible entity structure of the LLC but modeling the tax approach to the most applicable and beneficial model.
There are detriments to the LLC, however, primarily arising out of the lack of precedential case law offering guidance and interpretation on the legal implications of the structure. The corporation has been with us for far longer than the LLC. As a result, there is a vast background of guidance for courts to look to when legal issues arise. The (relatively) fledgling LLC does not have that same history on which to rely. This most applies in the context of the doctrine of “piercing the corporate veil”, under which the default limited liability protection can be lost based on the conduct of the owners. Single-owner LLCs, in particular, pose potential problems with respect to the loss of limited liability protection, but the implications and extent remain to be determined by courts in future cases.
Despite the negatives, the LLC remains a valuable and viable option for entity choice, particularly for small to mid-size businesses. As with any of these posts, it does not constitute legal advice and any person considering what entity type for his or her business should consult an attorney and CPA for legal and tax advice.
The information herein is not legal advice and does not create an attorney/client relationship. The information is in the form of legal education and is intended to provide general information about the matter. The above is not, nor is it intended to be, legal advice. Consult your attorney with questions.