A Minnesota business also may organize as a limited liability company. A limited liability company elects to be treated for tax purposes as a sole proprietorship (disregarded entity), partnership, or corporation. A limited liability company may have one or more members. As described further in the section on tax considerations in choosing the form of organization, organizers of Minnesota limited liability companies have some flexibility with respect to the federal income tax treatment of such entities due to the Treasury Regulations on entity classification. These Regulations appear in 26 C.F.R. § 301.7701-1 et. seq. A limited liability company with more than one member may choose to be taxed as a partnership or a corporation. In either event, the limited liability company must obtain both federal and state tax identification numbers, even if it has no employees.
A limited liability company with only one member may be taxed as a corporation or as a sole proprietorship. A limited liability company that chooses to be taxed as a sole proprietorship generally does not obtain a federal or state tax identification number unless it has employees in which case it will obtain tax ID numbers and use them to remit unemployment taxes. Business income and losses of the limited liability company that chooses to taxed as a partnership or as a sole proprietorship may be passed through to the owners of the business. The income of a limited liability company that chooses to taxed as a partnership or as a sole proprietorship is included in the taxable income of the member or members and taxed at the owner’s individual tax rate. Like a corporation, a liability for business debts and obligations generally rests with the entity rather than with the individual owners. A limited liability company is not subject to many of the restrictions that apply to S corporations. All members of a limited liability company may participate in the active management of the company without risking loss of limited personal liability. It is managed by a board of governors and an active manager.
There are three main differences between an S-Corporation “S-Corp.” and a Limited Liability Company “LLC”. These differences are (1) ownership restrictions, (2) the treatment of self-employment tax and (3) the distribution of profits and losses.
The ownership restrictions for an S-Corp. are much more substantial than those of an LLC. Pursuant to IRS code section 1362, an S-Corp. cannot have more than 100 shareholders. While this provision is very limiting, it does allow for a family to count as one shareholder. S-Corps. also have a limitation on who can be a shareholder. A shareholder must be either US citizens or resident aliens. What this means is that no corporations or LLCs may be a shareholder of an S-Corp. Finally, an S-Corp. may only have one class of stock. However, the S-Corp. can differentiate whether the shareholders are able to have voting rights in that one class of stock.
Often, new business owners question whether they need a member control agreement. They commonly don’t know of the possible pitfalls of operating without one. In this article we will address why a member control agreement for an LLC is a necessary component for the business. A member control agreement should address four primary issues.
Protecting Limited Liability of Single Member LLCs
While they can, and usually do address more, these four will be covered below, as they are necessary components to most LLCs.
When determining which entity an individual or group should form, one of the top choices is a limited liability company, also known as an “LLC”. While there are many benefits to forming an LLC, this post will discuss four of the more prominent ones.
The first benefit, and arguably the most important, can be found within the entity’s name. That benefit lies in the “limited liability” of the company’s owners. Limited liability means that owners are not personally responsible for the acts, debts, liabilities or obligations of the company based on his or her status as an owner. One important exception to this rule is that an owner will lose the liability shield provided by the LLC if he or she personally guarantees the debts of the company. This issue most commonly occurs when a small business takes out a loan from a lending institution. Often, the lending institution will not authorize the loan without a personal guarantee. Continue reading →